Projects on Microfinance in Pakistan by clr20728


Projects on Microfinance in Pakistan document sample

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                                April 2007

                              Eric Duflos (CGAP)
                            Alexia Latortue (CGAP)
                     Rochus Mommartz (CGAP Consultant)
                      Graham Perrett (CGAP Consultant)
                      Stefan Staschen (CGAP Consultant)
                                                             TABLE OF CONTENTS

LIST OF ACRONYMS ............................................................................................................................. iv
ACKNOWLEDGMENTS ............................................................................................................................ v
MAP OF PAKISTAN ............................................................................................................................... vi
PAKISTAN CLEAR WITH A POLICY DIAGNOSTIC—EXECUTIVE SUMMARY ........................................ 1
I.   BACKGROUND ............................................................................................................................... 3
II.     OVERVIEW OF MICROFINANCE IN PAKISTAN ............................................................................... 5
        Economic and Social Context .................................................................................................................... 5
        Evolution of the Financial System ............................................................................................................. 5
        History of Microfinance in Pakistan ...........................................................................................................6
        Microfinance Stakeholders ......................................................................................................................... 7
        Microfinance Funders ................................................................................................................................. 9
III. ANALYTICAL FRAMEWORK ......................................................................................................... 10
        Microfinance at a crossroad—from unsustainable growth to a robust inclusive financial system ......... 10
IV. FINANCIAL SYSTEM GAP ANALYSIS ............................................................................................ 12
        MICRO LEVEL (retail financial service providers) ................................................................................ 12
        Strengths at the Micro Level .................................................................................................................... 12
        Challenges at the Micro Level .................................................................................................................. 12
        Donor Recommendations at the Micro Level .......................................................................................... 14
        MESO LEVEL (support services, wholesale finance/apexes, networks) ................................................ 16
        Strengths at the Meso Level ..................................................................................................................... 16
        Challenges at the Meso Level .................................................................................................................. 16
        Donor Recommendations at the Meso Level ........................................................................................... 17
        MACRO LEVEL AND ROLE OF GOVERNMENT (Policies, laws, regulations, supervision, and
           other government interventions) ......................................................................................................... 20
        Strengths of the Macro Level ................................................................................................................... 20
        Challenges at the Macro Level ................................................................................................................. 20
        Recommendations at the Macro Level ..................................................................................................... 22
V.      DONOR SYSTEMS ........................................................................................................................ 25
        Strengths of Donor Systems in Pakistan .................................................................................................. 25
        Challenges of Donor Systems in Pakistan ............................................................................................... 26
        Recommendations for Improving Donor Systems ................................................................................... 28
ANNEXES ............................................................................................................................................. 31
        Annex 1—Summary Matrix of Recommendations .................................................................................. 33
        Annex 2—Recent Trends in Pakistan Microfinance ................................................................................ 34
        Annex 3—Microfinance Providers ........................................................................................................... 39
        Annex 4—Legal Framework According to Institutional Types ............................................................... 41
        Annex 5—Profile of PPAF ....................................................................................................................... 42
        Annex 6—List of Donor Projects ............................................................................................................. 43
        Annex 7—Donor Instruments .................................................................................................................. 44
        Annex 8—Donor Funding in Microfinance ............................................................................................. 45
        Annex 9—List of Documents Consulted ................................................................................................. 46
        Annex 10—List of Persons Consulted ..................................................................................................... 51


ADB       Asian Development Bank
AECI      Agencia Española de Cooperación Internacional
AKAM      Aga Khan Agency for Microfinance
AKRSP     Aga Khan Rural Support Programme
CDNS      Central Directorate of National Savings
CGAP      Consultative Group to Assist the Poor
CLEAR     Country-level Effectiveness and Accountability Review
EC        European Commission
FSAP      Financial Sector Assessment Program
FSD       Financial System Development
GDP       Gross Domestic Product
GoP       Government of Pakistan
GTZ       Gesellschaft für Technische Zusammenarbeit
HDI       Human Development Index
IFAD      International Fund for Agricultural Development
IFC       International Financial Corporation
IFI       International Finance Institution
IMF       International Monetary Fund
INGO      International NGO
JBIC      Japan Bank for International Cooperation
KB        Khushhali Bank
MDG       Millennium Development Goals
MFB       Microfinance Bank
MFI       Microfinance Institution
MFP       Microfinance Providers
MGP       Microfinance Group Pakistan
MIS       Management Information System
NBP       National Bank of Pakistan
NGO       Nongovernmental Organization
NPL       Nonperforming Loan
NRSP      National Rural Support Programme
NSS       National Savings Schemes
OCT       Orangi Charitable Trust
OPP       Orangi Pilot Project
PAR       Portfolio at Risk
PFSSRP    Pakistan Financial Services Sector Reform Programme
PMN       Pakistan Microfinance Network
PPAF      Pakistan Poverty Alleviation Fund
PR        Pakistan Rupees
PRSP      Punjab Rural Support Program
QAMM      Quality of Aid Management for Microfinance Index
RSP       Rural Support Program
RSPN      Rural Support Programmes Network
SBP       State Bank of Pakistan
SDC       Swiss Agency for Development and Cooperation
SECP      Securities and Exchange Commission of Pakistan
SRSP      Sarhad Rural Support Programme
TA        Technical Assistance
TRDP      Thardeep Rural Development Programme
UNDP      United Nations Development Programme
USAID     United States Agency for International Development
WB        World Bank
ZTBL      Zarai Taraqiati Bank Limited


The review team extends a heartfelt note of thanks to everyone who participated in the Pakistan
CLEAR with Policy Diagnostic. A great number of people involved in microfinance in Pakistan
generously met with the team, often more than once, and sometimes had to travel to meet us. While
we take responsibility for the views expressed in this report, our work would not have been possible
without these important meetings.
         More specifically, we thank the governor of the State Bank of Pakistan, Shamshad Akhtar, and
her staff for their extensive cooperation, especially on the Policy Diagnostic component. We are also
most thankful to the donor staff who championed this initiative: Sukanda Lewis and Azim Hashimi,
ADB; Stephen Rasmussen, World Bank; and Richard Kohli and Kanwal Bokharey, SDC. Awais Butt
from the European Commission/PFSSRP played an instrumental role in coordinating the Informal
Donor Group on Microfinance’s (a gathering of the main funders of microfinance) participation in the
review, including remarkable diligence in compiling background readings, helping to select key
informants, and serving as a resource for the team’s many questions. We also extend our gratitude to
Mohsin Ahmed and all the staff of PMN—they are an invaluable source of knowledge on Pakistani
microfinance who willingly gave of their time and ideas. PMN also helped the review team organize
visits to microfinance practitioners and clients, which helped anchor our views in the Pakistani reality.
       As the logistics coordinator for the review, Asim Mustaq’s tireless efforts were essential to the
successful execution of the review. Mr. Mustaq provided first-class support to the team—thank you.
         We would like to thank our CGAP colleagues. Tim Lyman provided key inputs in the design
of this joint aid effectiveness and policy review, and he helped prepare the debriefing presentation and
final report. Elizabeth Littlefield, Rich Rosenberg, and especially Syed Hashemi provided key advice
throughout the process. Finally, Aude de Montesquiou played an essential role throughout all the
stages of the review and in finalizing the report.
                                                                                             April 2007

                                MAP OF PAKISTAN

     Exchange rate in February 2007: 1 US Dollar (US$ 1) = 60.77 Pakistan Rupees PRs

At the request of eight development agencies (through the informal donor group) and the governor of
the State Bank of Pakistan (SBP), CGAP conducted a Country-Level Effectiveness and Accountability
Review (CLEAR) combined with a Policy Diagnostic in Pakistan in November and December 2006.
CLEARs and Policy Diagnostics have been carried out in over a dozen countries separately; both
methodologies were combined for the first time in Pakistan. The CLEAR with Policy Diagnostic for
Pakistan resulted in recommendations for two separate, but closely linked, types of actors: international
funding agencies and government agencies.
Recent developments in the banking sector. Pakistan implemented an impressive privatization of
the banking sector in the 1990s. State participation in the sector decreased from over 80 percent in
1990 to less than 20 percent today. The financial sector is now relatively stable and is a driving force
of economic growth. However, penetration of financial services remains low: only about 3 percent of
the population has access to the banking sector.
Evolution of pro-poor finance. Since the establishment of the Agricultural Development Bank (now
ZTBL) in the early 1970s, the Government of Pakistan (GoP), civil society, and later the private
sector have been interested in extending financial services to poor and low-income Pakistanis. This
was often done with support from international funding agencies and focused mostly on credit. In the
early 1980s, the Aga Khan Rural Support Programme (AKRSP) and the Orangi Pilot Project (OPP)
were launched. These, and the Rural Support Programs (RSPs), were general support institutions that
provided a wide variety of social services, including financial services. By the mid-1990s some RSPs
created specialized microfinance units—one of which became Kashf Foundation, a key microfinance
provider (MFP) in Pakistan today.
In the early 2000s, the GoP stepped up efforts to develop microfinance, with considerable funding
from large donors like the World Bank and the Asian Development Bank (ADB). The wholesale
facility Pakistan Poverty Alleviation Fund (PPAF) made its first loan to MFPs in 2002, and it now
dominates the refinancing market. One year later, the GoP facilitated the creation of Khushhali Bank.
Today, Khushhali Bank is the largest retail institution specialized in microfinance. However, it was a
specific microfinance ordinance created by SBP in 2001 that marked the beginning of a new era for
microfinance: by 2007 six microfinance banks (MFBs) had received licenses. The Pakistan
Microfinance Network (PMN) emerged in parallel. PMN is now a strong industry association
committed to transparency.
Findings at a glance. Despite a sound regulatory framework for microfinance and significant
injections of donor funding estimated at close to US$ 400 million over the past five years, there is a
lack of strong, sustainable institutions that are able to reach the scale necessary to have significant
impact. To date, microfinance in Pakistan has been largely regarded as a social service rather than a
financial service. Institutions that offer microfinance programs often do not clearly separate them from
social programs. Many MFPs have staff with strong social sector backgrounds, but little financial
sector expertise. And the emphasis on providing immediate assistance to target groups rather than on
providing ongoing access to financial services means that microfinance programs have not achieved
sustainability, despite large injections of development funds.
Funders and the GoP have missed an opportunity to create a strong and inclusive financial system as
a result of an ambivalent attitude toward sustainability and a lack of commitment to interest rates that
cover costs.
The results speak for themselves: The sector has grown at a relatively modest pace (700,000 micro-
borrowers out of a population of 160 million), and it relies on unsustainable institutions (from the
hundreds of MFPs in Pakistan, only two are sustainable). Although SBP set-up a conducive regulatory
framework, few institutions use it, and the GoP remains involved in direct provision of credit. At the
retail level, microcredit dominates while savings and other financial services are largely undeveloped.
To achieve greater access to capital on the part of institutions serving the poor, better protection of
poor people’s savings, and increased legitimacy and professionalization of the sector, microfinance
must be integrated into the financial system at all levels (micro, meso, and macro). An overview of
the strengths and challenges of Pakistani microfinance at the three levels of the financial system is
presented in the table on page 2.


                                 Strengths                                               Challenges

              •   There is a steady growth rate of services,      •   Institutional foundations for growth are weak (only
                  and geographical coverage is improving              two MFPs are sustainable )
    Micro     •   Telecommunications and physical                 •   Until recently, few MFPs had a successful business
                  infrastructure can be leveraged for financial       model for sustainable microfinance
                  services                                        •   MFPs are not responsive to clients’ needs
              •   PPAF allowed 100 flowers to bloom: there        •   The PPAF structure limits sustainable growth
                  are many MFPs
    Meso                                                          •   There is a lack of top-notch training and technical
              •   There is an active network—PMN                      assistance (TA)
                                                                  •   The commercial wholesale market is limited
              •   The macroeconomic and financial                 •   Some relevant actors within the GoP do not
                  environment is supportive                           understand microfinance
              •   There is a supportive microfinance legal and    •   SBP is at risk of overstretching its primary mandate
                  regulatory framework
                                                                  •   There are limitations of the regulatory framework
    Macro     •   SBP uses an extensive consultative process          (see full report for details)
                  for new policies
                                                                  •   There is inadequate information available on full
                                                                      scope of the sector
                                                                  •   The role of the GoP in direct retail credit delivery is

Microfinance at a crossroad. The CLEAR with Policy Diagnostic review took place at a critical time
for microfinance in Pakistan. Heightened interest from several parts of the GoP (political and technical)
together with the launch of several new donor projects by DFID, SDC, and USAID and the new ADB
loan provide an opportunity for a new direction. Whether this opportunity will be used to create a new
business model and boost for commercial microfinance depends on many stakeholders.
This report is addressed to all funders and government agencies that support microfinance in Pakistan.
It provides a snapshot of key issues facing the development community and policy makers engaged in
or concerned with microfinance. This report offers concrete recommendations on how to tackle these
issues. A table in Annex 1 summarizes all the recommendations of the report. The following are seven
priority recommendations determined by the reviewers:
1. Insist on sustainability. Funders must not encourage institutions to pass funding subsidy
    through to clients in the form of below-market interest rates. Funders should support specialized
    MFPs and insist on full cost-recovery interest rates in their funding agreements with MFPs.
2. Encourage innovation, new actors, and new approaches. Funders should create an international
    tender to attract experienced microfinance players (to build greenfield banks, for example) and
    support technological innovations, such as mobile phone-based financial services.
3. Promote a commercial wholesale market. Donors who fund PPAF’s microfinance activities
    should consider whether and how to provide fresh funds for the microfinance component. They
    should help PPAF spin-off its microfinance lending operations while developing incentives for
    commercial banks to lend to MFPs.
4. Diversify use of funding instruments. Funding agencies (private and public) should spend
    more money on capacity building rather than funding large credit lines through government.
    They should adapt to market needs by offering a palette of instruments, with a focus on those
    that provide incentives for savings mobilization.
5. Create a joint TA facility. During the take-off phase of microfinance, donors should make high-
    quality, flexible, and demand-driven TA available, possibly through a joint facility.
6. SBP should focus on regulation and supervision as a core role. SBP is the government agency
    in Pakistan with the most knowledge about microfinance. It has a specific mandate regarding
    regulation and supervision and should focus on this core mandate and function, while spreading
    good practice principles within the GoP.
7. Delineate government’s appropriate role as facilitator. The GoP has a crucial role to play as a
    protector and a promoter of microfinance, but it should not provide microcredit directly to clients.


I.       BACKGROUND                                             (as do the Financial Sector Assessment Programs).
                                                                Rather, CLEARs rely on an interview-based
                                                                methodology and a review of relevant literature
In early 2002, the Consultative Group to Assist
                                                                to assess development agencies’ systems and
the Poor (CGAP) launched an Aid Effectiveness
                                                                practices against the concrete and specific chal-
Initiative with leading development agencies,
                                                                lenges of building an inclusive financial system
using microfinance as a test case. In its first
                                                                in a particular country.
stage, between April 2002 and November 2003,
the initiative sponsored Microfinance Donor                     CLEARs strive to help funding agencies identify
Peer Reviews of 17 bilateral and multilateral                   gaps in financial systems and to design interven-
development agencies.1 The peer reviews helped                  tions that build on their respective comparative
donors focus on factors they could most directly                advantage. CLEARs also aspire to motivate
influence: their own procedures, processes, prac-               funders to improve their internal procedures and
tices, and systems. Top management and staff of                 systems so they can work more effectively with
participating agencies appreciated the frank and                others in the field and, thus, better contribute to
actionable recommendations of the review                        reducing poverty and achieving the Millennium
teams. All agencies are currently implementing                  Development Goals. Five CLEARs were con-
the recommendations, with promising results.2                   ducted from October 2004 through December
                                                                2006. The first CLEAR took place in Cambodia
The peer review exercise culminated in a high-
                                                                in October 2004, followed by Nicaragua in
level meeting in February 2004 called
                                                                February 2005, Madagascar in May 2005, and
Leveraging Our Comparative Advantage to
                                                                Sri Lanka in October 2005.4
Improve Aid Effectiveness. At that meeting,
participants synthesized the lessons learned                    On 20 October 2006, the second high-level
from the reviews, and they discussed steps for                  meeting of CGAP members, Better Aid for
further collective action. Following the meeting,               Access to Finance, gathered together heads of
the 17 agencies issued a joint memorandum that                  agencies and top managers of 29 development
endorsed five core elements of donor aid effec-                 agencies. Under the leadership of Jean-Michel
tiveness in microfinance: (1) strategic clarity,                Severino (AFD) and Kemal Derviş (UNDP),
(2) staff capacity, (3) accountability for results,             the agencies committed to four actionable
(4) relevant knowledge management, and (5)                      steps in the Compact for Better Aid for Access
appropriate instruments. Collectively, these                    to Finance, including improving field-level
elements are referred to as the “aid effectiveness              coordination and reporting to a new Quality of
star.” The agencies also committed to a four-                   Aid Management for Microfinance Index
step work program that included a mandate to                    (QAMM).5
expand the aid effectiveness work to the field.
                                                                Parallel to its aid effectiveness work, CGAP
CGAP member agencies jointly designed the                       also works on improving the policy envi-
Country-level Effectiveness and Accountability                  ronment for microfinance. In 2005, CGAP
Reviews (CLEARs).3 CLEARs focus on strategic                    launched a scaled-up Policy Advisory Initiative
issues relevant to the effectiveness of funders.                to encourage policy makers to adopt policies
They are not comprehensive sector studies that                  that help expand access to financial services.
deeply analyze financial systems development                    Policy diagnostics, which analyze the policy
__________________________                                      environment for financial institutions serving
                                                                the poor as a basis for formulating reform
 Seventeen agencies, including Agence Française de
Développement, African Development Bank, Asian
Development Bank, the European Commission, Finland,
                                                                recommendations, are an important tool of the
GTZ, ILO, the Netherlands, SIDA, and USAID, took part in        Policy Advisory Initiative.
drafting the Terms of Reference.                                __________________________
 For more information on Microfinance Donor Peer                4
                                                                 For more information on CLEARs, visit
Reviews, visit   5
                                                                 For more information on the Compact for Better Aid for
 AFD, AfDB, AsDB, DFID, EC, Finland, Ford Foundation,           Access to Finance and the Quality of Aid Management for
GTZ, ILO, IFAD, the Netherlands, Sida, USAID, and               Microfinance Index visit
UNDP/CDF                                                        menuitem.693e7785c87ea9a167808010591010a0/.


In early 2006, eight development agencies,                   clients of Kashf Foundation, Khushhali Bank,
through the informal donor group, requested                  Akhuwat, and the Punjab Rural Support
CGAP to conduct a review of the effectiveness                Program (PRSP). In addition, team members
of the funders’ support to microfinance in                   spent one full week with SBP staff to help them
Pakistan.6 At the same time, the governor of the             reflect on their role in further supporting the
central bank, the State Bank of Pakistan (SBP),              development of microfinance. For all matters
asked CGAP for assistance in developing a                    pertaining to the legal and regulatory frame-
strategy for SBP to expand microfinance.                     work, the team benefited from the expert assis-
Donors tend to work closely with government                  tance of Vellani & Vellani, a Pakistani law firm.
agencies in Pakistan, and many fund access-                  On 4 December, the review team organized two
related policy work. In consultation with both               debriefings, one with about 50 stakeholders
the donor group and SBP, CGAP decided to                     (government, funders, and practitioners) and
combine its aid effectiveness review metho-                  one with the management of leading funding
dology with the policy diagnostic approach.                  agencies. The team also provided special
The result is the CLEAR with Policy Diagnostic               debriefings to Salman Shah, the advisor to the
review that includes recommendations to two                  Prime Minister and to the SBP Governor.
separate, but closely linked, sets of actors—inter-
                                                             This report is addressed to all funders and gov-
national funding agencies (bi- and multilateral
                                                             ernment agencies that support microfinance in
agencies, international financial institutions [IFIs],
                                                             Pakistan. It provides a snapshot of key issues
investors, foundations, and nongovernmental
                                                             facing the development community and policy
organizations [NGOs]) and government agencies
                                                             makers engaged in or concerned with micro-
(SBP, ministries involved in finance issues, and
                                                             finance. This report offers concrete recommen-
regional authorities).
                                                             dations on how to tackle these issues.
The CLEAR with Policy Diagnostic review
                                                             CGAP, as a convener of 33 funding agencies,
took place in Pakistan (Islamabad, Karachi,
                                                             of which at least 11 support microfinance in
and Lahore) from 15 November to 4 December
                                                             Pakistan, is available to discuss this report in
2006. The review team was comprised of Eric
                                                             more detail. CGAP can also help funding
Duflos and Alexia Latortue (both CGAP staff)
                                                             agencies implement recommendations that
and CGAP consultants Graham Perrett, Stefan
                                                             focus on joint initiatives. Support is envisioned
Staschen, and Rochus Mommartz. Tim Lyman
                                                             at the country level for joint initiatives and at
(CGAP) advised on the policy aspects of the
                                                             the headquarters level for supporting and rein-
review and participated in the debriefings in
                                                             forcing changes suggested by the peer reviews,
                                                             when applicable. CGAP is also available to
The team interviewed more than 100 people                    continue its fruitful collaboration with SBP and
representing a broad cross-section of stake-                 other parts of the government.
holders, from government officials, to represen-
                                                             Section II of this report provides a brief
tatives of all types of microfinance funders and
                                                             overview of microfinance in Pakistan. Section
projects, to management and staff of micro-
                                                             III presents the analytical framework for the
finance providers (MFPs).7 The team also
                                                             review. Section IV presents an analysis of the
conducted an in-depth literature review and
                                                             three levels of the financial system (micro, meso,
collected information through questionnaires
                                                             and macro), and it provides recommendations
and focus groups. Team members traveled to
                                                             for funders and the Government of Pakistan
Lahore and met with MFP managers, staff, and
                                                             (GoP) to help build an inclusive financial sys-
 The agencies were ADB, DFID, the EC, IFAD, SDC,
                                                             tem. The discussion of the macro level consists
UNDP, USAID, and the WB.                                     of an analysis of the policy environment for
  The term “microfinance provider” is widely used to         microfinance. Finally, Section V examines the
describe the broad range of organizations providing finan-   strengths and weaknesses of donors’ systems
cial services to the poor, and it includes both regulated    relative to their microfinance operations, and it
microfinance banks (MFBs) and unregulated microfinance
institutions (MFIs).
                                                             offers concrete recommendations.


II.       OVERVIEW OF MICROFINANCE                                has offset the trade and invisible deficit. As a
          IN PAKISTAN                                             result, foreign exchange reserves increased from
                                                                  an average of US$ 1.3 billion in the 1990s to
                                                                  over US$ 12.12 billion, and Pakistan has
Economic and Social Context
                                                                  enjoyed a stable exchange rate over the last six
Pakistan has a population of 160 million (2006),                  years.
of which 65 percent live in rural areas. It is a
                                                                  Inflation remains the biggest threat to the econ-
relative outlier in the region, ranking low on
                                                                  omy. It jumped to more than 9 percent in 2005
both gross domestic product (GDP) per capita
                                                                  because of strong domestic demand and supply
(US$ 840) and the Human Development Index
                                                                  price shocks emanating from increasing com-
(HDI).8 The country has suffered from decades
                                                                  modity and oil prices. The SBP managed to
of internal political disputes, low levels of
                                                                  bring down inflation to 7.5 percent in 2006 by
foreign investment, and a costly, ongoing con-
                                                                  tightening monetary policy.
frontation with neighboring India.
                                                                  Despite the positive macroeconomic develop-
However, far-reaching macroeconomic reforms
                                                                  ments in recent years, widespread poverty
that started in the 1990s are now yielding posi-
                                                                  remains a core problem in the country. In
tive results and have helped transform Pakistan
                                                                  response to the rise of poverty during the 1990s,
into a relatively stable and resurgent economy.
                                                                  the GoP launched two Poverty Reduction
Real GDP has increased to an average rate of
                                                                  Strategy papers (2001 and 2003). The Poverty
over 7.5 percent per annum during the last three
                                                                  Reduction Strategy centers on accelerating
years (2004 to 2006). With the population grow-
                                                                  economic growth and maintaining macro-
ing at an average rate of 2 percent per annum,
                                                                  economic stability, while investing in human
the real per capita income has grown at a satis-
                                                                  capital, augmenting targeted interventions,
factory average rate of 5.6 percent. Medium-
                                                                  expanding social safety nets, and improving
term prospects for job creation and poverty
                                                                  governance. Over the last five years, the govern-
reduction are the best they have been in more
                                                                  ment spent US$ 22 billion on poverty-related
than a decade.9 The small and medium enter-
                                                                  and social sector programs to cater to the needs
prise sector, which constitutes 90 percent of
                                                                  of the poor and vulnerable sections of society.12
business in Pakistan, is regarded as an important
instrument of employment promotion.10 The                         These efforts helped to reduce the number of
official unemployment rate, which stood at 8.3                    people living under the poverty line from 33
percent in 2002, declined to 6.5 percent in                       percent of the population to the currently reported
2005.11                                                           24 percent. However, strong differences persist
                                                                  between rural and urban areas: 28 percent of the
Total remittances inflows through formal chan-
                                                                  rural population lives below the poverty line,
nels from 2001/02 to 2005/06 amounted to over
                                                                  compared with 15 percent of the urban popula-
US$ 19 billion, averaging 4.1 percent of GDP
                                                                  tion below the poverty line.
during the last four years. The sharp increase in
remittances, coupled with a growth in exports,
                                                                  Evolution of the Financial System
 Pakistan is ranked 134 out of 177 countries in UNDP’s            The evolution of the financial system in
2006 Human Development Report.                                    Pakistan is characterized by a long reform
 Participation of agriculture in GDP has fallen by 5 percentage   process that started in the late 1990s. The reform
points over the last 10 years, now contributing around 20         process focused primarily on building an effi-
percent. Source: The World Bank Group, “Pakistan at a
Glance,” 9/15/06, unpublished document.
                                                                  cient and competitive banking sector through
  State Bank of Pakistan, “Implications of Liberalizing
                                                                  privatization. It aimed at increasing transparen-
Trade and Investment with India,” Research and Economic           cy (greater disclosure and financial reporting)
Policy Departments, Karachi, 2004.                                __________________________
11                                                                12
  Pakistan Economic Survey 2005/2006, Ministry of Finance           Source, Government of Pakistan Finance Division Director
Pakistan (chapter 4 page 2) (available on Web page of             General (Debt Office)/ E.A, “Highlights of the Economy and
Ministry of Finance).                                             Federal Budget 2006–7”. Unpublished document.


and strengthening the supervisory capacity of                countries reach 80–100 percent). Finally, most
SBP by introducing a modern information sys-                 of the banking activities are concentrated in
tem, gaining greater autonomy from the                       Karachi and the other urban centers, leaving
Ministry of Finance (MoF), and reforming its                 large parts of the country underserved. The
human resources. These changes helped to lay                 banking sector has not yet shown any serious
the foundation for the future development of the             interest in serving poorer clients, and it is far
financial sector. Today, the financial sector                from being prepared to do so. In rural areas, the
exhibits a good degree of stability and sound-               Pak Post Savings Bank provides elementary
ness. It is one of the driving forces of economic            savings and payment systems. The GoP is still
growth.                                                      the primary source of funding in rural areas
                                                             through Zarai Taraqiati Bank Limited (ZTBL),
The success of the reform process is reflected in
                                                             the former Agricultural Development Bank.
the following statistics. The state’s participation
in the banking sector decreased from over 80
percent in 1990 to less than 20 percent today,               History of Microfinance in Pakistan
and banks have doubled their total assets since              The establishment of the Agricultural Develop-
2000.13 The now-dominating private banks have                ment Bank of Pakistan (now ZTBL) in the early
also drastically improved their performance. On              1970s represents an early effort to extend credit
average, commercial banks show a sufficient                  to poor people. The bank was established with
capital adequacy ratio (slightly above 12 percent).          a vision to provide rural finance to farmers,
They have also lowered their nonperforming                   especially small farmers. However, as has been
loans from a high of around 20 percent in                    the case of many agricultural banks worldwide,
1999/2000 to a current 6 percent. Commercial                 the Agricultural Development Bank ran huge
banks have improved their efficiency by reduc-               losses because of low lending rates and political
ing their cost/income ratio from 90 percent to 42            lending that resulted in major defaults by large
percent, and they reported their strongest results           landlords.15 It thus required continuous injec-
in history in 2006 with return on equity (after              tions of government subsidies.
tax) reaching on average 26 percent.14
                                                             The civil society entered the microfinance sector
This strong performance boost was accompa-                   in the early 1980s when the Aga Khan Rural
nied by a significant increase in outreach as                Support Programme (AKRSP) launched its
commercial banks improved their retail busi-                 credit operations in the North in 1982 and with
nesses. Banks’ SME lending also has been                     the establishment of the Orangi Pilot Project
growing very quickly, registering as much as 40              (OPP) in the same year. The AKRSP model
percent growth in 2003 alone, placing SME                    was replicated throughout Pakistan in the 1990s
lending growth just after consumer lending                   with the establishment of National Rural
growth. A still relatively high liquidity environ-           Support Programme (NRSP) and the Sarhad
ment (around 33 percent of total assets) is                  Rural Support Programme (SRSP). These rural
likely to motivate commercial banks’ efforts to              support programs (RSPs) were general support
increase their outreach.                                     institutions that provided a wide variety of
However, even given these positive develop-                  social services, including financial services.
ments, the Pakistani financial sector has not yet            Providing financial services to the poor was
reached sufficient breadth or depth. The banking             often socially driven and highly subsidized;
sector serves only around 5 million borrowers (3             little effort was made to recover delinquent
percent of the population) compared with 20                  loans.
million depositors. The loan portfolio/GDP ratio             To address these shortcomings, in 1996 some
of banks is around 30 percent (while OECD                    RSPs started to create specialized microfinance
                                                             units, and the specialized microfinance NGO
     Source: FSAP.                                           __________________________
  SBP, Quarterly performance review of the banking system,     PMN, “Evolution of Microfinance Industry,” unpublished
September 2006.                                              document.


Kashf Foundation was established. In 1998, the      As of December 2005, PMN had 18 members
precursor of the Pakistan Microfinance Network      and 27 MFPs reporting to its MicroWatch
(PMN) began to play a role in representing          bulletin. PMN produces detailed statistics on
emerging MFPs. Further developments followed        members’ performance.16
in 2000, when the Pakistan Poverty Alleviation
                                                    Financial service providers
Fund (PPAF) made its first loan to MFPs, and
                                                    A multitude of institutions provide micro-
SBP opened a microfinance unit. In 2001, the
                                                    finance services in Pakistan, ranging from
GoP helped to create a major retail institution,
                                                    government-owned institutions, MFBs, and
the Khushhali Bank, dedicated to serving the
                                                    cooperatives. Most of them are not specialized
                                                    in financial services, but rather combine micro-
The 2001 Microfinance Ordinance marked the          finance with other development or welfare
beginning of a new era in microfinance. With        programs, including health, education, commu-
the ordinance and various other subsequent          nity infrastructure, and human resource devel-
regulations, SBP laid the foundations to stimu-     opment. The main categories of MFPs are the
late the development of an inclusive financial      following:
system. This strategy was driven mainly by the
                                                    l      MFBs. MFBs are licensed by SBP, and
insight that MFBs can play an important role in
                                                           they are subject to SBP oversight. There
increasing the outreach of financial services. By
                                                           are six MFBs: Khushhali Bank (KB),
2007, six MFBs had received licenses.
                                                           Network Microfinance Bank, Pakistan-
Nevertheless, the overall expansion of this still
                                                           Oman Microfinance Bank, Rozgar
young industry has been less rapid and less
                                                           Microfinance Bank, Tameer Microfinance
solid than expected. The total number of loans
                                                           Bank, and the First Microfinance Bank.
outstanding is still negligible compared with the
total potential demand (see Annex 2 on recent       l      Multisectoral NGOs. Some NGOs run
trends), and deposit services are not well                 microfinance operations as part of their
developed.                                                 integrated development programs. Many
                                                           are PMN members, including Sungi
                                                           Development Foundation, Development
Microfinance Stakeholders
                                                           Action for Mobilization and Emancipation
Microfinance Practitioners Network                         (DAMEN), Save the Poor, Taraqee
PMN was created following a series of informal             Foundation, and Community Support
meetings among Pakistani delegates to the                  Concerns.
1997 Microcredit Summit in Washington, D.C.         l      Specialized NGOs.17 Other NGOs specialize
These delegates recognized the benefits of                 in microfinance or have microfinance as a
having an industry association. In 1999, the               major focus. Specialized NGOs that are
Microfinance Group Pakistan (MGP) was                      part of PMN include Asasah, Kashf
incorporated with funding from the Aga Khan                Foundation, OPP, Sindh Agricultural and
Foundation and the Asia Foundation. It later               Forestry Workers, SAFWCO, and Thardeep
became PMN, a legal entity under the 1984                  Rural Development Programme (TRDP).
Companies Ordinance.
                                                    l      RSPs. RSPs consist of programs that run
PMN’s mission and vision is to help foster the             microfinance operations as part of their
emergence of strong retail MFPs that are able to           integrated development programs. RSPs
provide quality and diverse financial services on          that are members of PMN include the
a large scale on a sustainable basis. To pursue            National Rural Support Program, the
this goal, PMN advocates for an enabling policy            Punjab Rural Support Program, and the
environment, encourages the acceptance of                  Sarhad Rural Support Program.
good practices throughout the sector, promotes      __________________________
the use of performance standards, and supports           See
financial transparency.                               PMN usually calls specialized NGOs “specialized MFIs”
                                                    in its reports.


                                                                    called Post Bank) is the main supplier of
             Box 1. Profile of Khushhali Bank
                                                                    savings and money transfer services
    Khushhali Bank (KB) was established in August 2000              through 7,500 branches across Pakistan18;
    under the GoP's Poverty Reduction Strategy. As part             ZTBL, supported by ADB, provides credit
    of this strategy, the Pakistan Microfinance Sector
    Development Program (MSDP) was developed with                   and savings services through its 343
    a loan of US$ 150 million from ADB. US$ 70 million              branches; and the Central Directorate of
    of this loan was made available to KB to fund micro-            National Savings (CDNS), attached to the
    finance lending. KB was initially capitalized by several
    commercial banks, and it is supervised by SBP under
                                                                    MoF, borrows funds from seven National
    a specifically designed ordinance. It is headquartered          Savings Schemes (NSS). CDNS operates
    in Islamabad, and it operates 64 branches throughout            through 12 regional directorates and 366
    the 38 districts in the country, including Azad Jammu           savings centers, servicing over 4 million
    and Kashmir.
                                                                    accounts.19 Based on preliminary CGAP
    KB was the GoP's first major initiative to service the          estimates that do not include NSS, Pak
    demand for microfinance services. The bank uses a
    group-lending community-based methodology as a
                                                                    Post and ZTBL account for more than
    means to reduce transactional costs. Its product                two-thirds of the small-balance savings
    line includes short-term microloans ranging up to               accounts. A recent government project,
    US$ 500 for working capital and loans for capital               named the Rozgar Scheme, also provides
                                                                    credit facilities. It targets young people
    According to KB's Web site (,          with loans of up to 100,000 PRs (about
    as of December 2005, the number of active borrow-
    ers was 227,000 with a loan portfolio outstanding of
                                                                    US$ 1,646) on highly subsidized terms
    1,923.2 million PRs (US$ 32.05 million). The average            through NBP.
    loan outstanding was 8,500 PRs (US$ 142), and              l    Cooperatives. The cooperative societies
    the portfolio-at-risk greater than 30 days was 4.8
    percent. Total equity was 1,895.7 million PRs (US$              used to have about 53,000 outlets, a sec-
    31.6 million). For the financial year 2005, the opera-          ondary structure of provincial cooperative
    tional self-sufficiency ratio was 71.5 percent and the          banks, and a federal bank of cooperatives
    financial self-sufficiency ratio was 51.2 percent.
                                                                    as an apex institution. However, the entire
    Source: PMN Performance Indicators Report, 2005.                cooperative movement went through a
                                                                    series of crises.20 Although the review team
                                                                    did not conduct a thorough research on
l      Commercial Financial Institutions                            cooperatives, it appears that cooperatives
       (CFIs). The core business of CFIs is not                     play a limited role in microfinance today.
       microfinance, but they have a separate                       Most cooperative banks, as well as second-
       microfinance department or division. ORIX                    tier institutions, have closed down. It is not
       Leasing Pakistan is part of this group.                      clear how many of the cooperative societies
l      Commercial Banks. Many commercial                            are still operating or how many of them
       banks provide microfinance services—                         offer financial services.
       although probably not in large quantities.              l    Informal Providers. As is common in
       Only a few track microfinance as a distinct                  most countries, there is a wide network of
       product category. These banks include First                  informal lending mechanisms throughout
       Women’s Bank, Bank of Khyber, and SME                        Pakistan. These include “committees”
       Bank.                                                        (rotating savings and credit associations),
l      Government-owned Institutions. Beyond                        family and friends, landlords, input
       certain government-owned commercial                          providers, traders, and moneylenders.
       banks like the Bank of Khyber, several                       Although it is difficult to quantify the
       government-owned institutions that reach                     monetary amount of services provided
       poor clients are often overlooked in discus-                 through these mechanisms (particularly
       sions on MFPs. There are several major                  __________________________
       examples: NBP provides a range of services                 Out of about 13,000 post office branches, 7,500 offer
                                                               financial services.
       to microentrepreneurs, including credit                 19
                                                                  Source: World Bank, Islamabad.
       and savings; Pak Post Saving Bank (often                20
                                                                  Source: ZTBL at a Glance Brochure.


    credit), it is likely to be widespread. Clients   societies under the 1860 Societies Registration
    interviewed by the CLEAR team during              Act or as trusts under the 1882 Trusts Act.21 The
    field visits highlighted the importance of        degree of regulatory oversight by these provin-
    such providers. According to clients, effec-      cial registration authorities is negligible. See
    tive interest rates charged by moneylenders       Annex 4 for a description of the legal frame-
    are usually around 300 percent per year.          work for each type of institution that provides
                                                      microfinance services.
Wholesale facilities (apexes)
PPAF is the main provider of wholesale refi-
nancing to MFPs. It was launched with World           Microfinance Funders
Bank support in 1999 to address a range of            At least 11 bilateral and multilateral donor agen-
development challenges, including the lack of         cies fund microfinance in Pakistan, along with
access to funding by nearly all unregulated           several international NGOs and private funders.
MFPs. Today, it refinances about 56 percent of        The two largest funders are ADB and the World
the microloans disbursed by retail providers          Bank, with commitments for microfinance
that are members of PMN. PPAF’s Microcredit           between 2000 and 2005 of about US$ 330 mil-
Loan Fund has 10,513 million PRs (US$ 175.2           lion from the ADB and US$ 169 million from
million), and its current outstanding portfolio to    the World Bank (the two largest recipients being
MFPs is 4,013 million PRs (US$ 66.9 million).         Khushhali Bank and PPAF, respectively).22 The
For more information on PPAF see Annex 5.             Department for International Development
Beside PPAF, the Orangi Charitable Trust              (DFID) is now coming in as the third largest
(OCT)/OPP also offers wholesale financing on a        funder in the market, with future commitments
limited scale to a number of rather small MFPs        of at least US$ 80 million until 2010.
in the provinces of Sindh and Punjab.
                                                             Box 2. Funders of Microfinance in Pakistan
Policy makers and supervisors
SBP is the supervisor of the formal banking            International:
sector, which includes the six MFBs.                   Multilateral agencies: ADB, EC, IFAD, IFC, ILO,
                                                       UNDP, World Bank
Commercial banks abide by the 1962 Banking
                                                       Bilateral agencies: AECI, DFID, JBIC, SDC, USAID
Companies Ordinance, while MFBs fall under
                                                       International NGOs: PLAN, ACTED, Save the
the 2001 Microfinance Ordinance. The                   Children US, Islamic Relief
Securities and Exchange Commission of                  International Private Investors: Citigroup, Deutsche
Pakistan (SECP) prudentially regulates non-            Bank (Global Commercial Microfinance
banking finance companies and insurance                Consortium), Shore Bank Int., Aga Khan Agency for
                                                       Microfinance (AKAM)
companies. NGOs and RSPs are registered by
                                                       Domestic funders:
the SECP as not-for-profit companies under
                                                       NGOs: Orangi Charitable Trust
Section 42 of the 1984 Companies Ordinance or
                                                       Government: Ministry of Finance
by provincial registration authorities either as

                                                        MFBs are licensed under SBP. Banks and MFBs are also
                                                      registered as companies under SECP, yet the prudential reg-
                                                      ulation by SBP is by far more important.
                                                           See Annex 8 on donor funding in microfinance.


III.         ANALYTICAL FRAMEWORK                                more transparent. Finally, institutions at both the
                                                                 micro and meso level evolve best in a conducive
Microfinance is a rapidly changing field.                        environment, the macro level, where policies,
International development assistance agencies                    regulations, and supervision set appropriate
endorsed Good Practice Guidelines for Funders                    rules of the game and create incentives for
of Microfinance in 2006, which reflects a con-                   increased access.
sensus of lessons learned over the past 30 years                 The key to the effectiveness of donors and
and translates them into practical operational                   socially oriented investors is to complement
guidance for staff of funding agencies.23 The                    private capital and accelerate domestic market
Guidelines will be revised periodically as the                   solutions. Funders can participate at the micro
field of microfinance continues to evolve and                    level through concessional finance (grants and
innovate. The Guidelines envision the integra-                   lending below market rates), which has a role in
tion of microfinance into the formal financial                   building the institutional capacity of financial
system as a means to achieve massive outreach                    service providers and underwriting the develop-
and maximum impact. The vision and opera-                        ment of experimental services; or at the meso
tional guidance outlined in the Guidelines                       level by supporting market infrastructure, such
serves as the standard against which the actions                 as rating agencies, credit bureaus, and audit
and behaviors of funding agencies are assessed.                  capacity; or at the macro level by fostering an
                                                                 enabling policy environment. Although donors
       Box 3. Three Levels of the Financial System
                                                                 cannot necessarily work well on all three levels
                                                                 of the financial system, each intervention—
     Micro: Retail financial service institutions (e.g., NGOs,   whatever the level—should promote the growth
     finance companies, banks, financial cooperatives,
     leasing companies, and other suppliers, such as             of the sector as a whole.
     moneylenders, agricultural traders, etc.)
                                                                 In general, integrating microfinance into finan-
     Meso: Service providers and industry infrastructure
     (e.g., networks, trainers, auditors, information
                                                                 cial systems allows for greater access to capital
     technology providers, wholesale financing facilities,       on the part of institutions serving the poor. It
     credit bureaus)                                             provides better protection of poor people’s
     Macro: Policy, laws, and the regulation and                 savings. And it increases the legitimacy and
     supervision framework (e.g., banking regulations            professionalization of the sector.
     and interest rate policy)

                                                                 Microfinance at a crossroad—from
Large-scale, sustainable microfinance can be                     unsustainable growth to a robust inclusive
achieved only if financial services for the poor                 financial system
are integrated into overall financial systems at
                                                                 When assessed against the analytical frame-
the micro, meso, and macro level (see Box 3).
                                                                 work, it becomes apparent that microfinance in
At the micro level, the retail financial institu-
                                                                 Pakistan has much to achieve. To date, micro-
tions and other suppliers that provide services
                                                                 finance in Pakistan has been regarded as a
directly to clients are the backbone of the finan-
                                                                 social service rather than a financial service.
cial system. They are the best positioned to
                                                                 Institutions that offer microfinance programs
understand and respond to clients’ demand for a
                                                                 often have not clearly separated them from
range of financial services well beyond micro-
                                                                 other programs. Staff have had strong social
enterprise credit—services that encompass
                                                                 sector backgrounds, but weak financial sector
savings, insurance, and transfers. In turn, at the
                                                                 backgrounds. And the emphasis on providing
meso level, retail institutions require support
                                                                 immediate assistance to target groups rather
services to train their staff, improve their
                                                                 than providing ongoing access has meant that
systems, refinance themselves, and become
                                                                 microfinance programs have not achieved
   For more information on the Good Practice Guidelines
                                                                 sustainability despite large injections of devel-
for Funders of Microfinance, visit            opment funds.


Funders and the GoP have missed an opportuni-        a new business model are needed for micro-
ty to create a strong inclusive financial system     finance to truly thrive in the country. Growth
as a result of an ambivalent attitude toward         led by sustainable, sound, and innovative insti-
sustainability and a laissez-faire attitude toward   tutions is the best way to ensure that massive
cost-recovery interest rates. Sustainability—that    numbers of poor Pakistanis will have permanent
is, the ability of an institution to cover its       access to diverse financial services that help
operational and financial costs—is crucial in        them take advantage of opportunities and man-
order for retail providers to continue providing     age life’s risks.
access to financial services and to expand their
                                                     Though donors never actively obstructed retail
operations without needing further subsidies.
                                                     financial providers from focusing on sustain-
Indeed, the beauty of microfinance is that it
                                                     ability in the past, they were mostly mute or
yields on-going social returns independent of
                                                     complacent on the issue. To initiate a new
subsidies. A strong microfinance sector can
                                                     approach to microfinance in Pakistan, donors
withstand setbacks, and it can continue to grow
                                                     must send clear signals, establish incentives,
irrespective of the whims and fashions of devel-
                                                     and condition funding to MFPs based on a com-
opment trends.
                                                     mitment to reaching sustainability. If far greater
Pakistan succeeded in implementing an impres-        numbers of Pakistanis are to have access to
sive privatization of the banking sector in          quality financial services, the way of the past
remarkable time. Similarly, a new approach and       cannot chart the course of the future.


IV.      FINANCIAL SYSTEM GAP                          annually.25 This growth was largely driven by
         ANALYSIS                                      Kashf Foundation, Khushhali Bank, NRSP,
                                                       and TRDP. Geographical coverage from these
                                                       institutions corresponds to population density
Using the analytical framework, the CLEAR
                                                       patterns across the country. Two-thirds of the
team examined strengths and weaknesses of the
                                                       country’s 123 districts have some coverage by
financial system at the micro, meso, and macro
                                                       PMN members, with services concentrated in
levels and provided recommendations.
                                                       the three most heavily populated provinces of
                                                       Punjab, North West Frontier, and Sindh.
(retail financial service providers)                   Existing infrastructure. In looking for poten-
                                                       tial avenues for increasing growth massively,
Poor people require access to diverse financial        two types of infrastructure merit mention.
services on a permanent basis from sound insti-        Exploring ways to tap into existing physical
tutions. In Pakistan, despite the reasonable           and telecommunications infrastructure is worth-
growth of microborrowers over the past few             while because it is generally much cheaper and
years, the future looks bleak because the growth       faster to leverage an existing network than to
that has been achieved is unsustainable. It is not     create a new one.
certain where future growth will come from,
because few of the existing providers have the         Physical infrastructure. Several state-owned
capacity or business model to expand quickly or        institutions, including ZTBL and Pak Post have
transform themselves into banks. MFBs, with            significant networks throughout the country.
some exceptions, have not met expectations             These institutions serve a diverse range of
with regard to sustainability, growth, or product      clients, including low-income and poor people
diversification, and commercial banks have dis-        that are in the same market segment as micro-
played little interest in downscaling. Finally, the    finance. Unfortunately, little is known about the
cooperative sector appears to have collapsed.          quality of the services they offer, and without
                                                       significant changes, they are unlikely to be an
The following recommendations are addressed            engine for growth (see current trends in
generally to all microfinance funders in               Annex 2). Moreover, the challenges of dealing
Pakistan. Recommendations at the micro level           with the legacy of heavy bureaucracy, possible
attempt to tackle the recurring theme of unsus-        political influence, and staff with poor banking
tainable growth presented earlier. Sustainable         skills at the state-owned institutions cannot be
growth requires sound and efficient institutions.      underestimated.
In 2006, combined MIX Market and Micro-
credit Summit data showed that the weighted            Telecommunications infrastructure. The 40 million
average annual growth rate in numbers of               mobile phone subscribers in Pakistan offer great
borrowers for all MFPs globally was 16 percent         opportunities to reach poor clients. Indeed, experi-
in profitable institutions, but only 2 percent in      ence from several other countries, including the
                                                       Philippines, shows how telecommunications
unprofitable institutions.24
                                                       infrastructure can been successfully exploited.
                                                       Moreover, mobile phone operators have no
Strengths at the Micro Level                           bureaucratic legacy issues.
Steady growth rate. Despite concerns with the
perceived slow growth and low market penetra-          Challenges at the Micro Level
tion, the results of the past few years are not that   Weak institutional foundations for growth.
bad. From the end of 2001 to the end of 2005,          The steady growth of the past few years is built
the number of microborrowers among PMN
members increased by an average of 60 percent          __________________________
__________________________                             25
                                                         Many figures used in this part of the analysis come from
  Gonzalez, A., and R. Rosenberg. “The State of        PMN, which provides a reliable source of information on a
Microcredit—Outreach, Profitability, and Poverty”      significant share of the institutions that provide retail financial
(Presentation).                                        services to poor people in Pakistan.


on a shaky foundation that does not bode well              why such models have not yet fully emerged in
for future continued growth, not to mention                Pakistan.
accelerated expansion.
                                                           Sustainability is not a major focus among
Prevalence of unsustainable institutions. Only             MFPs. Though most microfinance stakeholders—
two of the 27 institutions reporting to PMN are            MFPs, donors, government representatives—note
sustainable: Kashf Foundation and OCT.26 As a              the importance of sustainability, few articulate a
result, most MFPs are depleting their capital and          specific strategy for its achievement. This is
thus rely on donors and/or subsidized credit               true even of MFPs that have business plans. In
from PPAF to continue operating. The weak                  general, the long-term management vision and
financial position of MFPs limits opportunities            corresponding strategy for achieving sustain-
for diversifying funding sources from commer-              ability is missing from MFPs.
cial banks, international investors, or local
                                                           Low interest rates do not permit full cost recovery.
deposits. Weak, unsustainable MFPs are not
                                                           Most MFPs in Pakistan do not charge their
good candidates for transformation into MFBs.
                                                           clients interest rates that are high enough to
Although retail providers cannot be expected to
                                                           enable them to cover their costs and grow their
be sustainable overnight, and the path toward
                                                           portfolio. A look at the average operating
sustainability may differ according to local
                                                           expenses of PMN members compared with the
markets, global (and Pakistani) evidence suggests
                                                           revenues generated from the loan portfolio
that new institutions are reaching sustain-
                                                           (yield on portfolio) suggests that MFPs are not
ability more rapidly—often within three years of
                                                           pricing their loans appropriately. On the one
                                                           hand, the average operating expense ratios of
Thin middle management. Sustainability is not              PMN members are basically in line with the
just about financial soundness. Competent                  regions’ overall low ratios (PMN is at 22.4
human resources are also critical to the long-             percent and total Asia is 22.8 percent). On the
term viability of institutions. Although Pakistan          other hand, revenues generated from the loan
has some top-level universities and training               portfolio (e.g., the yield on portfolio) are low at
institutes, MFPs find it difficult to attract and          18.8 percent for PMN members (compared with
retain good staff, especially middle management            30.7 percent in Asia on average).27
willing to work in rural areas. Accountants are
                                                           Subsidies passed on to clients. The most suc-
easy to find, but graduates with the managerial,
                                                           cessful MFIs worldwide have benefited from
strategic thinking skills, and the judgment
                                                           concessional funding and/or grants from donors.
necessary to open and manage branches are
                                                           Donor support, such as up-front investment and
rare. Some multiservice institutions, such as
                                                           subsidized wholesale funding, helps MFPs build
RSPs, are staffed with middle management that
                                                           their capital base and build systems to later
come from social services backgrounds and do
                                                           become sustainable. These subsidized funds are
not possess financial management skills.
                                                           not meant to be passed on to the end client.
Limited demonstration business model, until                Passing on the subsidies means that institutions
recently. Countries that have been successful in           forgo the opportunity to become strong enough
expanding microfinance have often had a lead               to raise commercial capital, or intermediate
institution that served as a “demonstration”               funds, and grow independently of donor funds.
model to the rest of the market. ACLEDA in                 Moreover, the subsidies can skew the credit
Cambodia and Bancosol in Bolivia, for exam-                culture because clients are not exposed to the
ple, paved the way for a vibrant set of institu-           real cost of obtaining credit. Although it may
tions to follow. Even though some may argue                seem morally attractive to pass subsidies to
that Kashf and Tameer Bank have the potential              clients, it actually prevents a larger number of
to play this role, several reasons help explain            __________________________
                                                             Figures from Stephens, B., and Hind Tazi [editor] et al.
__________________________                                 “Performance and transparency: A survey of microfinance
 For figures, see Table 5 on financial sustainability in   in South Asia,” Microfinance Information eXchange, Inc.,
Annex 2 on recent trends in Pakistan microfinance.         Washington, D.C., January 2006.


people from accessing services in the long run,        Donor Recommendations at the Micro Level
because institutions cannot expand significantly
                                                       Insist on sustainability. Donors should do
without using initial subsidies to build their
                                                       more than send signals about the importance of
own capacity. Invested well, donor subsidies
                                                       sustainability. They should condition disburse-
can yield ongoing returns, not just a one-time
                                                       ments of funds against the achievement of this
resource transfer.
                                                       key goal. In agreeing to milestones for further
Confusion between microfinance and charity.            funding tranches, donors should take the time
Microfinance has received attention from the           to understand MFPs’ business models. Though
GoP, donors, and the Pakistani civil society as a      MFIs around the world are getting sustainable
useful means to reduce poverty. Unfortunately,         more quickly, the number of years it takes
it often has been perceived as a kind of social        to reach sustainability depends in part on the
transfer, or charity. The main preoccupation is to     targeted client segment and the zones of inter-
transfer funds to specified target groups and, if      vention (urban versus rural, for example).
the funds rotate, all the better. The predominant
                                                       Support specialized MFPs. With few excep-
view and business model perpetuated by donors
                                                       tions, the largest and best providers of financial
and the main wholesale facility has erred on
                                                       services to poor people are either specialized
the side of social services rather than financial
                                                       MFIs/banks or institutions that have units or
                                                       departments dedicated to microfinance. Although
Lack of responsiveness to clients. The range           poverty reduction requires a holistic approach
and nature of product offerings by MFPs leaves         and microfinance alone is not sufficient, the track
much to be desired. The Pakistan microfinance          record of stand-alone microfinance suggests
market is dominated by one financial service—          that donors should support institutions that focus
credit—and many MFPs use a methodology                 staff and activities on the provision of sustainable
inspired by the Grameen model. Clients make            financial services. The reason is simple: the
do with institutions that nearly all offer the iden-   delivery of financial services to the poor
tical product, typically a small loan with six- or     requires banking skills and specific systems and
twelve-months tenure, group guarantees, and bi-        operating procedures that are different from
weekly repayments.                                     social mobilization and development (e.g., MIS,
                                                       loan analysis and recovery). Micro-level finan-
The lack of deposit services deserves particular
                                                       cial services delivery is a specialized business—
emphasis. Beyond compulsory savings, few
                                                       albeit a social one—in its own right. Donors
institutions offer, or try to attract, deposit
                                                       who currently support multipurpose institutions
services. Though MFBs can legally mobilize
                                                       should help them separate their financial services
deposits, most do not focus on microsavings.
                                                       from other services and share lessons learned
First Microfinance Bank offers deposit services,
                                                       from the few institutions that have managed to
but its large savings portfolio with a relatively
                                                       provide both services globally (e.g., BRAC,
low number of accounts suggests that it reaches
                                                       BASICS, and more recently, Bandhan28).
wealthier clients. Tameer Bank has a diverse
portfolio, including institutional savers as well      Insist on full cost-recovery interest rates in
as a few microsavers. Commercial banks have            contracts with retail financial institutions.
not shown interest in microsavings at all, nor         Donors should insist that retail MFPs charge
has the government-backed Khushhali Bank.              cost-recovery interest rates to clients. This
Pak Post is probably the most important source         requirement should be part of all donors’
of microsavings. According to CGAP estimates,          contracts/agreements that involve direct funding
Pak Post has 3.6 million savings accounts, with        to the retail level or indirect funding via inter-
an estimated 70 percent below 10,000 PRs               mediaries, such as apexes or project management
(about US$ 165) though it is hard to get good          units located within a government body. Cost-
numbers. See Annex 2 on recent trends for              recovery interest rates need to cover operational
additional details.
                                                            For more information, visit


costs, the loan loss provision, cost of funds,        Promote mobile phone-based financial services.
and a profit margin that will be used for rein-       Fast developing experience in other countries
vestment in the institution to fund expansion. In     shows that mobile phone-based financial services
parallel, donors should promote efficiency,           can work for the poor and can scale up very
transparency, and competition to ensure clients       rapidly (e.g., Globe Telecom’s G-Cash product
can access quality financial services at the best     in the Philippines). Some donors are already
price possible, and they should discourage            either involved, or planning to get involved, in
MFPs from passing on subsidies to clients.            supporting this new age of microfinance.
                                                      Preliminary results from a recent CGAP diag-
Encourage innovation, new actors, and new
                                                      nostic of the legal framework for mobile phone
approaches. There is a large unmet demand
                                                      banking in Pakistan suggest that the market
for financial services among poor people along
                                                      could easily be opened up by amending some
with the weak micro level dominated by unsus-
                                                      key laws affecting mobile phone banking. The
tainable institutions. This suggests that there is
                                                      informal donor group should help coordinate
room for additional players and an urgent need
                                                      funding for this field, given donors’ growing
for new approaches and innovation. Donors
should do their part to encourage the next
generation of microfinance in Pakistan.               Fund up-front investment costs of information
                                                      communication technology (ICT). Technology
Create international tenders to attract experi-
                                                      holds the promise of reducing transaction costs
enced microfinance players. There is space in
                                                      for financial service delivery and increasing
the market for new retail financial service
                                                      outreach to clients in remote areas. The use of
providers with strong management teams, sound
                                                      technological devices, such as personal digital
operating models, effective internal systems,
                                                      assistants, can also improve the efficiency and
knowledge of product development, and inno-
                                                      transparency of loan officers. These technolo-
vative delivery channels. Greenfield institutions
                                                      gies involve high upfront costs that donors can
should be considered. The upcoming entry of
                                                      help support, including investing in hardware
BRAC in Pakistan is also promising. Attracting
                                                      and software, training staff, and revising opera-
the best players—whether international, region-
                                                      tions. Introducing new technology also requires
al, or domestic—through a demand-driven ten-
                                                      market research to understand client usage and
der with a transparent due diligence process (but
with minimal micromanagement) could provide
a powerful demonstration effect by sustainable        Make use of existing infrastructure. Donors
institutions capable of high growth. The tender       could prudently explore possible strategic
would be for flexible funding to cover start-up       alliances between existing MFPs and state-
and expansion costs.                                  owned financial institutions with large net-
                                                      works, such as Pak Post Savings Bank and
Bring in investors for know-how, governance,
                                                      ZTBL. Admittedly, this could be tricky—it is
and equity. As some MFPs mature and reach
                                                      uncertain how this potential opportunity could
sustainability, they will need new types of fund-
                                                      be exploited. Therefore, the key is to start slowly
ing partners. The current donors should use their
                                                      with a thorough analysis of these infrastructures
contacts to draw in development finance institu-
                                                      to obtain a better understanding of their opera-
tions, investment funds, and social investors that
                                                      tions and to become more familiar with their
offer not only new instruments, but perhaps most
                                                      management. Depending on the results of such
important, key know-how and strong governance.
                                                      investigations, there may be a role for donors
Donors can help this process by (1) disseminating
                                                      to help underwrite pilot projects. It might be
knowledge about the Pakistani microfinance
                                                      prudent to start with savings.29
sector internationally in partnership with PMN;
(2) organizing investors’ fairs to showcase the
best and brightest institutions (two-way learning);
and (3) using individual contacts to bring in         __________________________
                                                        The Post Bank is legally not permitted to go into the
selected investors on a case-by-case basis.           lending business and would not have the capacity to do so.


Establish incentives for retail providers to                   whether rapid market expansion will be driven
diversify funding sources. Donors should use                   by a multitude of relatively small institutions
performance-based contracts that include an exit               (“100 flowers”), a few dominant market leaders,
strategy, thus making it clear from the outset                 or perhaps a combination of both. PPAF also has
that subsidized funds are temporary so that                    played a significant role in social development.
MFPs will use them wisely to prepare for a                     Social development and the provision of basic
more commercially oriented future. Donors also                 services, such as shelters, water, education, and
can provide positive incentives for MFPs to                    health, are at least as important as microfinance
access commercial refinancing by offering TA                   to reduce poverty.
and training on how to negotiate with banks on
                                                               An active network. PMN is an independent and
contracts and proposals for loans, revolving
                                                               well-respected organization. Its management is
lines, overdrafts, etc. Because only MFBs can
                                                               well-connected with Pakistani retail MFPs, GoP
intermediate funds, donors can also help pay for
                                                               actors concerned with microfinance, and inter-
the often expensive costs of transformation,
                                                               national microfinance discussions. With support
including underwriting transformation plans,
                                                               from donors, such as DFID, USAID, SDC, and
upgrading systems, legal costs, subsidizing a
                                                               the EC, the network has become the best source
transformation manager, etc.30
                                                               of transparent information on key indicators,
                                                               such as outreach and sustainability. Its annual
MESO LEVEL                                                     performance indicators report is a hallmark pub-
(support services, wholesale finance/apexes,                   lication.31 PMN also engages in some advocacy
networks)                                                      work, and it represents a good portion of the
The meso level (market infrastructure) of the                  traditional MFPs.
financial system has an important role in sup-
porting the consolidation and expansion of retail              Challenges at the Meso Level
providers, promoting transparency, and provid-
                                                               Structure of leading apex limits sustainable
ing wholesale financing. Nonfinancial services
                                                               growth. Several donors have injected large
that help strengthen governance, financial man-
                                                               amounts of money into PPAF given the popu-
agement, information systems, and delivery
                                                               larity of microfinance and the ease of channel-
technologies are not readily available to MFPs
                                                               ing funds through an apex institution. This
in Pakistan. Moreover, the structure of the
                                                               trend is continuing. The dominance, structure,
wholesale finance market contributes to the
                                                               and incentives of PPAF pose several chal-
unsustainable growth that characterizes micro-
                                                               lenges for which donors that fund PPAF are
finance in Pakistan.
Strengths at the Meso Level                                    No cost-recovery strategy. PPAF does not
                                                               preclude its MFP partners from charging cost-
PPAF allowed 100 “flowers” to bloom. PPAF                      recovery interest rates to their clients, but
provided capital and TA to a core group of                     neither does it encourage or require it. Most
emerging MFPs in the country, which surely                     MFPs pass on the subsidized wholesale interest
contributed to the growth of the sector at                     rate (8 percent, compared with 11–14 percent
its early stage, because very few MFPs were                    market rate from commercial banks) to their
savings based, and commercial banks were not                   clients. With this interest rate subsidy pass-
interested in lending to emerging MFPs. As                     through, the retail providers are not able to
Pakistan microfinance is preparing to enter an                 recover their costs with revenues from interest
acceleration phase, the outstanding question is                collected and thus are not able to invest in
__________________________                                     strong systems that can ultimately become
  See Ledgerwood, J., and Victoria White, “Transforming        sustainable. As long as subsidized funds from
Microfinance Institutions: Providing Full Financial Services   PPAF are available, MFPs will continue to
to the Poor,” 2006, and State Bank of Pakistan, “NGO
Transformation Guidelines,” State Bank of Pakistan,            __________________________
Karachi, 2005.                                                      See


grow and reach more clients. But, if funds            Limited commercial wholesale market.
disappear or are reduced, MFPs will not have          Commercial banks are reticent to lend to
the means nor strategy to continue growing            MFPs. Those who do insist on draconian terms
independently. Moreover, the availability of          of up to 133 percent cash collateral, which
cheap funds with limited performance require-         means not only zero leverage, but negative
ments creates disincentives for MFPs to diversi-      leverage. Several reasons explain banks’
fy their funding sources either by going to the       extreme conservatism. First, MFPs are not
commercial market or by transforming into             financially sustainable—commercial banks
MFBs to be able to intermediate deposits. (The        worldwide get interested only when they see
latter is more feasible in Pakistan today given       opportunities for profits at a tolerable risk
the lack of commercial banks’ interest in small       level. Second, banks have no appetite because
balance deposit mobilization). PPAF may actu-         they have lower risk alternatives, such as treas-
ally provide incentives against sustainability as     ury bills (they can pay 2–5 percent on savings
institutions that do become sustainable lose          accounts and get either 8.8 percent for six
access to PPAF’s funds for TA.                        months or 9 percent for 12 months on treasury
                                                      bills). If a greater number of MFPs become
Blurred line between social services and financial
                                                      sustainable (and will therefore need commer-
services. PPAF’s partners receive funding for
                                                      cial capital to grow), new opportunities for
both financial services and social services from
                                                      commercial wholesaling will undoubtedly
the same entity (even if these functions are
                                                      arise. At that point, commercial banks’ interest
increasingly separated within PPAF). Interviews
                                                      may emerge, but the risk will then be that banks
with partners suggest that this approach creates
                                                      may be crowded out by cheap funds available
mixed messages about the institutional require-
                                                      from donors and PPAF.
ments for providing these two types of services
well. Most of PPAF’s partners are multipurpose
organizations governed by people with social          Donor Recommendations at the Meso Level
backgrounds that are perhaps better positioned        The donor community has made significant
to offer social services than financial services.     contributions at the meso level, especially by
Without strong internal financial skills, MFPs        supporting the development of a strong net-
are unable to cover their costs and therefore to      work, the PMN, and by providing wholesale
offer sustainable financial services to an            funding at the infant stage of the microfinance
increasing number of poor people.                     industry. Donors, however, have underestimated
Rigid disbursement procedures may not be              the need for a more commercial approach to
sufficiently responsive to partners’ needs. For       microfinance refinancing institutions. Perhaps
example, linking grant and TA as a proportion of      more important, they have generally neglected
the loan size could create inappropriate incen-       the most critical area of support required in
tives for participating organizations to take loans   Pakistan: building the capacity of MFPs to
just for TA, because some partners may need just      enable them to expand in a sustainable way.
TA and no debt. Moreover, this approach allows        Promote commercial wholesale market.
for little tailoring of capacity-building services    Donors can and should play a leading role in
to MFPs’ needs based on their stage of develop-       promoting sustainable refinancing mecha-
ment and specific strategy/business plan.             nisms for MFPs. Recommendations include the
Lack of top-notch training and TA. For smaller        following:
MFPs, it can be difficult to find basic training in   Spin-off lending operations of PPAF and
all aspects of microfinance operations. More          establish an “access to finance fund.” The
sophisticated MFPs have an even harder time.          major funders of PPAF, most notably the World
Although accountants are easily available, it is      Bank, but also IFAD and USAID, should
much harder to find and train middle managers         carefully consider whether and how to further
who are critical to preparing for growth, manag-      fund the microfinance component of this
ing growth, and expanding operations.                 apex. For the “take-off” (the second phase of


microfinance toward more sustainable growth),         microfinance among key stakeholders involved.32
donors should adopt a marked policy shift that        Donors also could help MFPs negotiate with
prioritizes a commercial approach to wholesale        commercial banks and provide TA for MFPs to
funding and a focus on the provision of high-         produce solid business plans. These activities
quality capacity-building support. Institutions       would help commercial banks have a clear under-
that work in remote areas or with very poor           standing of how the microfinance market is
clients might require more time and support to        evolving and the risks and opportunities it entails,
become financially sustainable.                       which is key for commercial banks that want to
                                                      calculate with precision how they will/can
Pakistan is a huge country with a large unmet
                                                      manage risks of any lending operation. Finally,
demand for microfinance funding. Creating a
                                                      development finance institutions like Asian
separate legal entity for accessing refinancing
                                                      Development Bank and KfW should use instru-
for more mature, commercially oriented MFPs
                                                      ments that promote access to domestic, commer-
is an attractive approach. This entity could help
                                                      cial funding markets, such as guarantees, and
MFPs/MFBs to mitigate exchange rate risk, to
                                                      make creative use of their funds to take first loss
initiate capital market operations like securitiza-
                                                      tranches or pay the legal fees of securitizations.
tions or bond issues. It could extend guarantees
for MFPs to borrow domestically or abroad. The        Create a joint TA facility. Because micro-
best legal institutional set up for this fund would   finance in Pakistan is on the verge of a possible
have to be determined following more research         “take off” stage, donors should prioritize
and thought.                                          making available high-quality, flexible, demand-
                                                      driven TA. Placing a high priority on TA will
Even more important than legal form are the
                                                      require a mindset change for most donors with
suggested operating principles for this facility.
                                                      a lot of experience in the country. An attractive
Principles that appear extremely important to
                                                      option is to establish a major TA facility. One
the review team include the following:
                                                      or two donors could take the lead to set-up
l    Insist on complete separation from any           the facility, keeping it open for others to join
     social services, to protect both social          over time. This would avoid a situation where
     services and financial services.                 a multitude of donors offer small TA grants to
l    Ensure that donor/government funding             various MFPs with different criteria and differ-
     comes directly to the fund, not through the      ent reporting and monitoring mechanisms. Such
     parent structure (in the event the fund is       a facility could take various forms. DFID and
     established within PPAF’s legal structure).      USAID, in particular, have funded interesting
                                                      models globally that are worth exploring. In the
l    Adopt commercial lending principles (e.g.,
                                                      long run, MFPs should be able to purchase TA
     commercial/cost-recovery interest rates,
                                                      from existing private and public TA providers,
     leveraging funds through the use of
                                                      so this facility would have to have a limited
     guarantees, and transparency in reporting
                                                      lifespan. Principles to consider in designing
     of a spun-off entity).
                                                      such a facility include the following:
l    Have a separate, experienced board of
     financial sector professionals for the           l    Expert management is key. Donors should
     proposed “access to finance fund.”                    hire management who have a good track
                                                           record in TA provision, who are well-
Develop incentives/eliminate disincentives for             versed in TA good practices, and who have
commercial banks to lend to MFPs. Inter-                   broad networks with a range of local,
national donors could organize forums and                  regional, and international TA providers.
visits with other bankers interested in micro-
                                                      l    A significant, patient upfront investment and
finance to expose Pakistani banks to micro-
                                                           commitment is needed. Donors probably
finance. Donors could support the GoP to fund
                                                           should plan on a five-year facility to start.
campaigns to increase the overall knowledge           __________________________
and transparency of the microfinance market           32
                                                        The Financial Institutions (Recovery of Finances) Ordinance
and foster a vision of commercially oriented          2001, mentions setting up banking courts for debt recovery.


     Preferably, the facility should base its               financing a thorough study of Pak Post Savings
     funding decision on the business plan of               Bank to better understand its functioning, per-
     the candidate MFPs.                                    formance, and clientele reached (how many
l    Insistence on the performance-based                    low-income clients). The study could then
     provision of TA and on some form of cost-              explore the feasibility of improving existing
     sharing with MFPs is needed to maximize                services, creating linkages with MFPs to reach
     effectiveness. Early in the process, donors            poor clients, and adding new services.
     should put in place performance and                    Continue support for PMN. Although PMN
     sustainability incentives.                             should seek to provide fee-earning services
l    A core package of services should focus on             and progressively earn more of its own
     strategic and business planning, governance/           income, it is reasonable to assume there will be
     board composition, human resource                      a need for further donor subsidies to finance its
     development, financial structure, branch               “public good services.” Its transparency and
     management, and product development.                   advocacy work are especially important public
l    Links to the financial and banking sectors             goods. PMN could even consider stepping up
     are beneficial. Donors should think about              its transparency work. With donor support, it
     how to tap into banking training (NIBAF,               could, for example, co-finance ratings for
     Institute of Bankers of Pakistan).                     MFPs, especially with rating companies
                                                            increasingly offering differentiated products,
l    Flexible approaches to institutional devel-
                                                            such as institutional assessments and social rat-
     opment should be put in place, including
                                                            ings. It also should determine how to ensure
     executive programs, certificate programs,
                                                            the three regional networks (Sindh, Punjab,
     exposure visits, workshops, in-house
                                                            and Sarhad MFN) complement each other in
     resident advisors, etc.
                                                            the best possible way.
Conduct action research on specific areas
                                                            Understand the full range of organizations
(savings, Pak Post Savings Bank). Donors can
                                                            reaching poor and low-income people.
help MFPs consider options for diversifying
                                                            MFPs are narrowly defined in Pakistan. Yet
their product range (now focused on working
                                                            studies on the global provision of financial
capital loans) by paying for market studies on
                                                            services to poor people indicate that a large
the supply and demand for financial services.
                                                            range of organizations, often state-owned, also
Product development is sorely needed, but it
                                                            touch the same market segment that interests
would be imprudent to rush into new approaches
                                                            microfinance.34 Currently, most microfinance
or set targets for new products without a sound
                                                            stakeholders focus on organizations that are
basis of analysis. An upcoming access to
                                                            members of PMN or that get funding from
finance study funded by DFID, the World Bank,
                                                            PPAF. There are, however, many organizations
and SDC using the Finscope methodology will
                                                            that require significant attention. Such organi-
provide valuable information on the demand
                                                            zations include postal banks, savings banks,
side. Several donors and PMN also have
                                                            etc. Donors in Pakistan could pay for PMN, the
recently decided to place a greater emphasis on
                                                            Bureau of Statistics, or even a rating firm to
savings. CGAP has developed an assessment
                                                            broaden data collection from institutions such
methodology to identify opportunities and
                                                            as ZTBL, Pak Post Savings Bank, and the
constraints to deposit mobilization at the three
                                                            National Savings Scheme (NSS). Doing so
levels of the financial system. This experience
                                                            would provide a much better picture of all
could be of use.33 Donors also could consider
                                                            financial services reaching poor people in
__________________________                                  Pakistan.
  Five Country Level Savings Assessments have been
conducted by CGAP in 2005 (Benin, Bosnia, Mexico,           __________________________
Philippines, Uganda). A toolkit for Country Level Savings     Christen, Robert Peck, Richard Rosenberg, and Veena
Assessments is currently being developed by CGAP and        Jayadeva, “Financial Institutions with a Double Bottom
should be available soon on    Line: Implications for the Future of Microfinance,”
resource_centers/savings/country_level_assessments.         Occasional Paper 8, Washington, D.C.: CGAP, July 2008.


MACRO LEVEL AND ROLE OF                             compulsory savings, provided these are held in
GOVERNMENT                                          trust for customers in a licensed bank.) All
(policies, laws, regulations, supervision, and      MFBs are required by law to be rated annually
other government interventions)                     within three years of being granted a license, in
                                                    keeping with the regulator’s appropriate empha-
The GoP has historically played a significant       sis on transparency. SBP’s parallel issuance of
role in promoting microfinance. Since the           guidelines for commercial banks undertaking
1990s, SBP, in particular, has shown keen inter-    microfinance, which prescribe four different
est in expanding poor people’s access to micro-     modes of doing so, exemplify the regulator’s
finance, and interest has increased among other     commendable encouragement of a variety of
parts of the government more recently. This sec-    institutional models at the retail level. In gener-
tion looks at the results of years of macro-level   al, SBP has used its rule-making powers quite
interventions by both donors and the GoP: that      effectively to strike a sensible balance between
is, the current legal and regulatory and govern-    provisions aimed at creating a viable space for
ment policy environment for microfinance in         new MFPs and provisions aimed at preserving
Pakistan. Finally, it offers recommendations        the soundness of the regulated institutions and
both to donors that work closely with govern-       the protection of their retail depositors.
ment agencies and to government agencies
themselves that are most concerned with micro-      In the past five years, SBP also has considerably
finance, notably SBP.                               strengthened its own institutional capacity as
                                                    regulator and supervisor of MFBs and commer-
Strengths of the Macro Level                        cial banks engaged in microfinance. SBP has
                                                    prioritized training its staff on basic micro-
Supportive macroeconomic and financial              finance; it also has organized specific training
environment. Pakistan benefits from a relatively    on supervising MFBs. SBP has implemented
sound macroeconomic environment with a stable       special procedures for the supervision of MFBs,
currency and positive economic growth of            and SBP has dedicated trained staff for micro-
almost 7 percent per year. The GoP also suc-        finance inspections.
cessfully launched an ambitious financial sector
                                                    Extensive consultative process on new policies
reform, which resulted in the privatization of 80
                                                    by SBP. SBP follows the good international
percent of the banking sector. The soundness of
                                                    practice of inviting feedback from financial
banking institutions has also improved, with a
                                                    institutions and other stakeholders when devel-
sharp reduction of nonperforming loans (NPLs),
                                                    oping new policies. For example, SBP sends all
capital adequacy improvements, and a recent
                                                    new policies as drafts for consultation to the
trend of good profitability. Moreover, the
                                                    industry. In the process of finalizing the recent
Pakistani banking sector is in compliance with
                                                    2006 Finance Bill, which included amend-
most of Basel’s 25 core principles and 39 out of
                                                    ments to the 2001 Microfinance Institutions
41 International Accounting Standards.
                                                    Ordinance, PMN and others provided comments
Supportive microfinance legal and regulatory        to SBP, and SBP listened. Such consultation
framework. Pakistan introduced a specialized        could serve as an example to countries world-
law for MFBs in 2001 (the Microfinance              wide.
Institutions Ordinance), which is respected
worldwide. The law, together with its imple-        Challenges at the Macro Level
menting regulations, describes several types of
MFBs, offering NGOs that provide financial          Misunderstandings about microfinance.
services a ready option for transformation into     Although SBP is viewed by many as the lead
prudentially licensed and supervised depository     government agency for microfinance, there are
institutions and also providing a vehicle for       other important government agencies, such as
starting greenfield MFBs. (The law does not         MoF and the Prime Minister’s Office, that also
affect NGO MFPs that do not engage in retail        are involved. In addition, there seems to be
deposit taking, and they are permitted to accept    some common misunderstandings about recent


evolutions in microfinance, about what it can         Issues pertaining to SBP. Although SBP is a
accomplish, and about how it can function sus-        strong regulator with a deep commitment to and
tainably. These misunderstandings tend to take        knowledge of microfinance good principles, it
several different forms.                              nonetheless has its own challenges.
Overstated expectations of microfinance as an         Risk of overstretching mandate. According to
instrumental poverty alleviation tool. The            the 1956 SBP Act, SBP’s role is to regulate the
Pakistan Poverty Reduction Strategy Paper             monetary and financial system of Pakistan and to
makes microfinance one of the main vehicles           foster its growth. The possibility of SBP taking
for targeting the poor and vulnerable. There is       on a more promotional role could potentially
indeed good evidence that access to a range of        conflict with its duties as prudential regulator
financial services can play a strong role in alle-    and supervisor if, for example, SBP were to
viating poverty, but microfinance is by no            become involved with funding decisions con-
means a magic bullet. Many other services, such       cerning licensed and supervised institutions.
as health, education, and infrastructure, may         Overstretching its mandate also could prove
have more direct impact on poverty alleviation.       challenging in terms of staffing, because some
                                                      SBP staff trained in microfinance supervision
Limited awareness of good practice micro-
                                                      have already left or have been rotated to a dif-
finance principles. Outside SBP, few GoP staff
                                                      ferent department linked to SBP’s promotional
know about microfinance good practice. For
example, some staff at SECP do not know that
credit-only MFPs can register with them. Some         Narrow concept of microfinance as separate
players in the market believe that all MFPs must      from the overall financial sector. Microfinance
be registered with SBP. However, credit-only          is about all types of small-scale lending, retail
MFBs do not have to come under SBP regula-            deposit taking, and other financial services for
tion, but can operate under several legal forms,      the poor. However, in its strategy, the SBP has
the one with the strongest external oversight         treated microfinance as distinct from agricul-
being a company limited by guarantee under the        ture, housing, and Islamic finance, and the SBP
jurisdiction of SECP. Where knowledge of good         Development Finance Group has been struc-
practice does exist, it tends to be concentrated at   tured accordingly. This artificial isolation has
the central level. Very few government staff at       translated into separate SBP concept notes for
the regional level are aware of microfinance          each of these areas, despite the considerable
good practices. Provincial governments some-          overlap among them.
times intervene in the financial sector with
                                                      Limitations of regulatory framework. Despite
unsustainable approaches. For example, one of
                                                      favorable regulatory framework for micro-
the few remaining provincial-owned financial
                                                      finance in Pakistan, certain limitations came to
institutions, Bank of Khyber, started by the
                                                      light during the review.
North West Frontier Province government, was
forced to restructure several times because of        Aspects of the Microfinance Ordinance and its
loan losses, then moved into microfinance, but        prudential regulations restrict MFBs from
its board members did not allow cost-covering         growing. Some regulatory provisions create
interest rates.                                       obstacles for the growth of current MFBs and
                                                      may discourage some new MFPs from becom-
Lack of willingness to address real costs of
                                                      ing licensed. For example, the 150,000 PRs
microcredit delivery openly. Many people in
                                                      (about US$ 2,468) loan ceiling prevents MFBs
GoP believe that clients’ main concern is a low
                                                      from diversifying their client base when clients
interest rate. But global and domestic evidence
                                                      grow and require larger loan amounts.35 MFBs
shows that access and quality of services are at
least as important to many poor households.           __________________________
                                                        The loan size limit has only recently (February 2007)
Interest rates ought to be compared with the
                                                      been increased from 100,000 PRs to 150,000 PRs. However,
next best alternative, which is often the informal    80 percent of the loan portfolio should still be within the
money lender (not commercial banks).                  previous limit of 100,000 PRs.


cannot offer loan products that require larger             loans in rural and agriculture finance (336,000
amounts, such as housing loans, even if these              microloans last year). Another example is
still serve the poor. Clients with strong potential        Khushhali Bank. Despite its private ownership
to create employment cannot be served at all,              structure, almost every stakeholder interviewed
because there is very little supply of loans               considered it to be a state bank. The president of
between 150,000 and 1 million PRs (the size                Khushhali Bank is appointed by the president of
needed for a medium enterprise). The require-              Pakistan, and many people mentioned that the
ment for MFBs to lend only to poor persons is              Bank has to follow GoP recommendations to
too restrictive and difficult to monitor.36                open branches such as those in the earthquake
                                                           areas. Although a majority of the bank’s direc-
Minimum capital requirements are not adjusted
                                                           tors represent the private banking sector, they
to district population. The uniform minimum
                                                           apparently do not have a strong influence on
capital for district-level MFBs can make it diffi-
                                                           operations and strategic decisions, and share-
cult to establish viable institutions in districts
                                                           holders do not receive dividends. The new gov-
with low population density, because the capital
                                                           ernment-led Rozgar Scheme, which targets 2
requirements may be too high in these districts.
                                                           million young people with business loans at
Insufficient information on full scope of the              subsidized interest rates, is a clear illustration of
sector. There is a lack of nationwide supply-              increased activity of GoP in retail credit deliv-
side data on all the types of financial services           ery. It is ironic that, on the one hand donors help
the poor require. This issue is partly linked              the government privatize its formal banking sec-
with a narrow and varying understanding of                 tor, while on the other hand they support the
what “microfinance” is. For example, the Credit            government’s direct involvement in retail
Information Bureau, which is part of SBP,                  microcredit.
includes only data from regulated financial
institutions (banks, MFBs, and NBFCs), while               Recommendations at the Macro Level
PMN captures only data from approximately
27 MFPs (which includes mostly unlicensed                  Although SBP is not the only government actor
MFPs). Neither does it include data from the               with authority and responsibility for the finan-
Pak Post Saving Bank or the NSS. The lack of               cial system, the following recommendations
information on the full scope of the sector pre-           pertain largely to SBP’s role in promoting the
vents regulators and policy makers from taking             expansion of sustainable microfinance, both
into account all the market players, especially            from a regulatory/supervisory perspective and
on the savings side.                                       from a general policy perspective. Donors that
                                                           support SBP and other parts of the GoP also can
Inappropriate intervention in credit delivery.             benefit from these recommendations.
Although there is broad recognition that the GoP
has made significant progress in transforming a            SBP to focus on core role in regulation and
state-owned banking system into a private-led              supervision. SBP’s primary role is to regulate
commercial banking system, the GoP is still                and supervise the banking sector, including
involved in direct credit delivery and this role           microfinance. It also has a role to foster the
could be exacerbated by the upcoming elections.            development of the financial services, but it
For example, the government-owned ZBTL                     needs to get the right emphasis and balance
lends at 9 percent (or 8 percent, net of the               between “promotion” and regulation.
rebate), which is below market rates, and it has           Avoid situations that may create conflicts of
huge NPLs. Despite numerous restructuring                  interest for SBP. SBP should not get involved
plans with donors’ assistance, ZBTL continues              in funding decisions that create a conflict of
to make a large number of subsidized small                 interest with its role as supervisor. If SBP has to
__________________________                                 conduct due diligence on incoming proposals
  The 2006 amendments to the Microfinance Ordinance        from financial institutions or make funding
authorize SBP to prescribe the income level determining
who is regarded poor. SBP has set the limit at an annual
                                                           decisions about such proposals, it compromises
income of 150,000 PRs.                                     its neutrality as a supervisor of the same


institution. Donors will need to make sure that       emergence of sound institutions that can ensure
they do not push SBP to play such a role, even if     future sustainable growth. Major change will
it may be very tempting to do so, given the SBP’s     happen only once a critical number of sustain-
strengths as a partner for work on microfinance.      able institutions emerge in the country. The
                                                      review did not identify regulatory obstacles as
View microfinance as a range of financial
                                                      a primary factor preventing the emergence of
services. When formulating strategies for devel-
                                                      sustainable MFPs.
oping an inclusive financial sector and making
decisions about its own organizational structure,     Introduce more flexibility on loan size limit.
SBP should treat microfinance as an issue that        SBP could allow for a more flexible loan size
cuts across different areas. As such, it should       limit while at the same time preventing mission
make available international know-how in all          drift, for example, by combining a higher loan
areas of development finance, including housing       size limit with a limit for the average size of
finance, rural finance, SME finance, agricultural     outstanding loans.
lending, Islamic finance, and microfinance.
These should not be viewed as distinct and unre-      Change the requirements that MFBs serve only
lated disciplines when formulating concept            poor people. To prevent overexposure to con-
notes. More important, interest in extending var-     sumer loans and the risk of regulatory arbitrage,
ious types of credit to the unbanked poor should      SBP could limit the ratio of loans extended to
not eclipse their need for other types of financial   salaried people over total portfolio.
services, particularly small-balance savings          Link minimum capital requirements for district-
products and affordable payment services.             level MFBs to population size. The current 100
Improve dissemination of SBP’s policies, regula-      million PRs capital requirement for district-
tions, and guidelines. SBP, possibly with donor       level MFBs should be decreased in low-density
support, should organize seminars for line min-       districts. While working on adjustments to
istries, provincial governments, and the industry     ensure outreach in underserved areas, SBP
at large, to sensitize them on the existing regula-   should balance this objective with its own
tory framework and to clarify who should come         supervisory capacity.
under the purview of SBP and who should not.          Establish a conducive framework for branchless
For example, credit-only MFPs do not and do           banking. CGAP’s recent policy and regulatory
not need to come under the purview of SBP.            diagnostic on branchless banking in Pakistan
Disseminate key principles of microfinance and        will provide concrete recommendations for
international experience widely. To reduce the        how SBP and other government actors can
knowledge gap between SBP and the rest of             help branchless banking take off in Pakistan. As
GoP regarding microfinance, and especially            previously noted, branchless banking is a prom-
about what it takes for microfinance to grow on       ising way of lowering transactions costs of
a sustainable basis, SBP should sensitize other       financial service delivery, taking advantage of
parts of the government, including SECP, MoF,         existing infrastructure, such as post offices,
and provincial authorities. Exposure needs to         retail shops, and petrol stations.
deepen beyond top management ranks. This
                                                      Subject Khushhali Bank to the same regulatory
sensitization also could include financial
                                                      treatments as MFBs. There are some important
providers that are not typically considered
                                                      differences in the legal, regulatory, and supervi-
microfinance organizations, such as ZTBL, Pak
                                                      sory treatment of Khushhali Bank and other
Post Saving Bank, and commercial banks.
                                                      MFBs that should be corrected. Harmonized
Refine regulatory framework. Some minor               treatment would send a positive signal domesti-
policy changes could improve the environment          cally and globally to investors that there is a
for institutions to transform into MFBs and           level playing field for all MFBs in Pakistan. It
facilitate current players’ ability to innovate       should also be a precondition for selling the
around products and delivery channels. But            government’s stake in Khushhali Bank (NBP
these changes alone will not bring about the          owns 23.5 percent of KB).


Establish internal standards for responding to          Base future strategies on a full understanding of
requests that require approvals by SBP. SBP             where poor people access financial services.
should set targets for its response time to             The GoP, with SBP taking the lead, is currently
requests coming in from the market, for exam-           developing a strategy for increasing access to
ple for license applications, branch opening, or        finance. The strategy, and the diagnostic under-
changes of board membership. Setting and                pinning it, should be careful to treat micro-
meeting appropriate response standards would            finance as an integral part of the financial
enhance SBP’s professional reputation and               system rather than as something separate and
help ensure prompt decisions on applications            unique to itself. Understanding where (the
from the market. Such a measure would send an           diversity of financial providers—not only PMN
important signal to local and international             members) and what kind of financial services
investors and reduce barriers to entry.                 (not only credit, but also savings, transfers,
                                                        insurance, etc.) poor people currently access is
Continue to require NGOs that want to collect
                                                        essential to ensure the strategy is based on a
voluntary savings from the public to apply for a
                                                        sound diagnostic. The process of developing
license. The current SBP policy of authorizing
                                                        the strategy should include consultation with
NGOs to mobilize compulsory savings should
                                                        other parts of GoP that are concerned with
be maintained because compulsory savings
                                                        microfinance, such as the MoF and provincial
usually represent a small portion of the loans
clients seek to obtain from NGOs. These sav-
ings should continue to be held in an account           Be realistic about targets. The review revealed
with a financial institution regulated by SBP in        a focus on ambitious outreach targets for
the name of the client or client group. In general,     microfinance. The overriding focus on targets,
CGAP considers that any institution that col-           especially ones that may be overambitious and
lects savings from the public should be pruden-         that are not likely to be met, can distract from
tially regulated to avoid putting poor people’s         the more fundamental question of creating
savings at risk. However, in addition to compul-        sustainable institutions that will serve clients. In
sory savings, exceptions also can be made for           addition, it raises the risk of undue disappoint-
savings collected from members in small, member-        ment if targets are not reached. Such a scenario
owned organizations because (1) the cost of             could lead the government to take a proactive
supervising many small organizations is too             role at the retail level to quickly meet the target
high for most central banks; (2) the alternative        or it could unfairly penalize strong MFPs that
(shutting them down) would most likely lead to          could eventually reach scale.
poor people putting their savings in even riskier
                                                        Avoid initiating government credit programs. In
places, e.g., under the mattress; and (3) the risk is
                                                        the context of the overall lack of sustainability
usually minimal because of these organizations’
                                                        and the poor performance of government-
small size. Of course, further investigation into
                                                        owned banks in Pakistan, GoP should avoid
the specificities of Pakistan would be required
                                                        creating new credit programs such as the Rozgar
for more detailed legal advice.
                                                        Scheme. Instead, GoP should continue to phase
Delineate government’s appropriate role as that         out its existing credit programs. GoP also should
of facilitator. GoP has a potentially important         be cautious with large-scale loan forgiveness
facilitating role to play in developing access to       programs, because such a policy decreases
finance in Pakistan, beyond creating the optimal        credit discipline, which negatively affects the
regulatory and supervisory environment. The             growth of the sector. Instead, GoP should insist
review team has several recommendations on how          on increasing sustainability in the delivery of
the GoP could improve its role as a facilitator,        financial services to the poor.
while avoiding direct provision of credit services.


V.       DONOR SYSTEMS                                         1. The The Aid Effectiveness Star
                                                        FigureFigure 1.Aid Effectiveness Star

The fundamental premise of CGAP’s work on                                  Strategic Clarity
improving the quality of aid is that it is the
responsibility of development agencies to get
                                                        Appropriate                             Staff Capacity
their own houses in order to engage effectively in      Instruments
microfinance. In spite of significant funding and
broad consensus on good practice microfinance,
many donor programs waste money, undermine
markets, and fail to reach their objectives.
Many factors, such as local politics, governance
and regulation, macroeconomic conditions,
partner performance, and the ability of develop-        Relevant Knowledge                   Accountability for
ment agencies to work together and engage with             Management                            Results
local stakeholders, influence the impact of
microfinance programs at the country level.
                                                               Box 4. Elements of Aid Effectiveness
Literature on the quality of aid tend to focus on
these factors. Unfortunately, there is little dis-       Strategic Clarity: Coherence of agency’s vision of
                                                         microfinance. Vision is in line with accepted good
cussion about the supply side of the equation—
the quality of the management systems of the
                                                         Staff Capacity: Staff with technical capacity.
development agencies themselves.                         Appropriate systems to select and monitor out-
                                                         sourced expertise and implementing partners.
Five core elements of effectiveness—strategic
                                                         Accountability: Knowledge of the microfinance
clarity, staff capacity, accountability, knowledge       portfolio. Transparency of portfolio performance.
management, and instruments—are key to                   Knowledge Management: Knowledge gained from
improving the way in which funders support               agency’s own and other’s experience.
financial systems for poor people. These core            Instruments: Ability to work directly with the private
elements emerged from the 17 Microfinance                sector. Wide range of flexible instruments.
Donor Peer Reviews facilitated by CGAP, and
they have been confirmed through the five
CLEARs conducted to date. These elements,               Using the Aid Effectiveness Star as a frame-
depicted as the Aid Effectiveness Star (Figure 1),      work, the following sections discuss the extent
are defined in Box 4. They have been formalized         to which the development agencies working in
in the updated Good Practice Guidelines for             Pakistan are set up to support microfinance
Microfinance Funders.                                   effectively. Individual agencies may fare better
                                                        or worse than this common description of the
Although not every agency can be equally strong         donor community as a group. In this section,
in each area, a minimum level of performance in         specific agencies are mentioned by name only
all areas is critical for donors to achieve so they     to provide examples of strengths.
can abide by the “do no harm” principle.37 These
elements have been discussed, refined, endorsed,
and reconfirmed time and time again by devel-
                                                        Strengths of Donor Systems in Pakistan
opment agencies. Their relevance is clear:              Progression toward a financial systems
improving these elements creates an environ-            approach. After a long history of funding sub-
ment conducive to designing better microfinance         sidized credit lines, donors are now taking a
programs (and other types of programs as well).         broader approach that tackles the challenge of
                                                        improving poor people’s access to financial
__________________________                              services from a financial systems perspective.
 See Tamara Cook, with input from CGAP staff,
“Maximizing Aid Effectiveness in Microfinance,” CGAP
                                                        Donors are examining constraints and opportu-
Donor Brief No. 22, February 2005,   nities at all three levels of the financial system


and are viewing poor people’s finance as an              funding approaches, such as providing the first
integral part of the financial sector. The upcom-        loss coverage for bond issues.
ing ADB loan for improving access to financial
                                                         The increasing use of diverse instruments fol-
services, which goes beyond refinancing by
                                                         lows the arrival of new types of funders to
including building the capacity of key institu-
                                                         microfinance in Pakistan, including the Grameen
tions at all levels of the financial system, illus-
                                                         Foundation, Unitus, Shorecap, the IFC, Soros,
trates this new trend.
                                                         and OPIC. These funders bring new know-how
Learning from past experiences. Several                  that will likely influence more traditional donors.
donors have taken stock of lessons learned from
                                                         Emergence of donor coordination. An infor-
their first generation of microfinance program-
                                                         mal microfinance donor group was established
ming. Donors like ADB, SDC, and UNDP have
                                                         in 2004. The group includes major microfinance
learned that money or capital is not the main
                                                         funders and provides a useful mechanism for
constraint to extending microfinance and that
                                                         collaboration. As a result, coordination among
providing massive credit lines to one institution
                                                         the various donors seems to be improving. A
generally is not the best approach. Most have
                                                         striking example is the swift response of donors
reoriented their programs to include funds for
                                                         to the pressure to use microfinance following
capacity building. The CLEAR team heard of 14
                                                         the October 2005 earthquake. A joint note from
donors and investors that are providing or plan-
                                                         the WB and DFID, which received support
ning to fund TA. Moreover, some donors are
                                                         from other donors, helped programs separate
taking serious action on the recommendations
                                                         emergency/recovery grants from microfinance.
of evaluation reports, including redesigning or
                                                         This approach is a stark contrast to what hap-
adjusting programs. For example, the Financial
                                                         pened in Sri Lanka following the tsunami,
Sector Strengthening Program of the Swiss
                                                         where massive amounts of uncoordinated funds
Development Cooperation (SDC) refocused its
                                                         that mixed grants with microfinance rushed into
support in its second phase of microfinance
                                                         the affected areas. Concerted donor efforts and
programming to support more promising
                                                         engagement also contributed to a recent shift of
                                                         ADB programming from focusing uniquely on
Selected experimentation with new instru-                Khushhali Bank to focusing on a new loan that
ments. The bulk of donor funding for micro-              takes a broader financial systems approach.
finance still flows through loans to govern-
ments. However, several newer funders to                 Challenges of Donor Systems in Pakistan
microfinance are increasingly using other
instruments such as equity and guarantees. For           Pakistan is among the countries with the largest
example, the Deutsche Bank’s Global                      amounts of donor funding for microfinance
Commercial Microfinance Consortium is                    globally. Yet despite significant funding, donors
providing funding through guarantees. In                 missed opportunities to help build a solid finan-
November 2006, it extended a US$ 500,000                 cial system with sustainable institutions serving
Standby Letter of Credit for the benefit of              poor and low-income populations. In fact, the
Asasah, an MFP in Lahore. The Global                     best developed level of the financial system is
Commercial Microfinance Consortium borrows               one where donors have had limited input: regu-
in local currency from Deutsche Bank Karachi             lation and supervision. The challenges outlined
to lend to Asasah. In this case, the funder              below attempt to explain why donors have
is analyzing both the bank and the MFP and               failed to foster the rapid development of a sus-
is bearing the foreign exchange risk.38 Some             tainable, inclusive financial system in Pakistan.
funders are experimenting with more creative             The way in which donors have used their funding
                                                         instruments is certainly a major contributor to this.
  To learn more about guarantees, see Flaming, M.,       Strategic Clarity/Vision
“Guaranteed Loans to Microfinance Institutions: How Do
They Add Value?” Focus Note 40, CGAP, Washington,        Lack of understanding of what financial sys-
D.C., January 2007.                                      tems development entails. Donors lack a clear


strategy for helping to develop a financial sys-     success this way has created harmful “disburse-
tem that is inclusive and that serves the needs of   ment pressure.” Several donor staff privately
all people, including poor people. Lack of a         cited that the major incentive is to get money
clear strategy stems from a fundamental lack of      out the door, not the actual results achieved
understanding of the financial sector, appropri-     with donor funds. One donor staff was told to
ate business models for retail institutions to       “spend the money at all costs.”
grow without subsidies, the support services
                                                     Little performance-based funding. There appears
needed, and poor people’s demand for financial
                                                     to be little link between performance and dis-
services. Consequently, most donors concen-
                                                     bursements. The review team learned of cases
trate too narrowly on the potential size of the
                                                     where, despite the existence of performance-
market for microcredit, with a near obsessive
                                                     based contracts, disbursements continued with-
focus on outreach numbers. Too little attention
                                                     out renegotiation, even when major targets were
is spent on the institutions, market infrastruc-
                                                     missed. In several instances, including for one
ture, and enabling environment that will be able
                                                     of the largest programs, donor staff responsible
to deliver quality financial services to large
                                                     for monitoring projects did not have the appro-
numbers of poor people. As previously men-
                                                     priate technical skills to determine whether the
tioned, donors have learned that new approach-
                                                     project was on track.
es are needed. Most now have a sense of what
not to do, but not yet what to do. There is a gap    Unpredictability of donor funding. Though not
between the international good practices for         unique to donors supporting microfinance in
microfinance endorsed by most donors and the         Pakistan, it merits mention that donors too often
way in which they implement programs on the          do not respect their engagement with partners.
ground.                                              For example, changing donor priorities/strategies
                                                     at headquarters resulted in funding being cut
Poor knowledge about the key drivers of sus-
                                                     literally overnight in at least one case.
tainability. Donors do not sufficiently promote
                                                     Unpredictable donor funding nearly led to a
sustainability of retail institutions because they
                                                     breakdown of regional networks.
do not fully understand how strong, sound,
sustainable institutions are built. Although some    Staff Capacity
of the most successful MFIs in the world bene-       Over-reliance on a few technical staff. Given
fited from grants or concessional loans when         the huge amounts of donor funding in Pakistan
they started, they were later able to refinance      (about US$ 400 million disbursed between
themselves through the private sector or deposit     2000 and 2005), the number of donor staff
mobilization. In fact, access to free or cheap       with microfinance/financial sector training in
capital is not the key driver to sustainability.     the country is disproportionately low. Though
Rather, crucial elements of sustainability are       donors work through various intermediaries
management capacity, institutional capacity,         and often outsource responsibility for technical
financial soundness, product range, ability to       work, a minimum level of trained, internal
intermediate, and funding structure. Moreover,       staffing is important to collaborate effectively
donors may have misplaced the need for sus-          with other funders and stakeholders like PMN
tainability at the meso level, thinking that the     and GoP and to ensure basic oversight. If one or
sustainability of the refinancing wholesale facil-   two of the stronger donor staff were to leave,
ity they support was an end in itself.               there would be a significant vacuum.
Accountability for Results                           Instruments
Misplaced measure of success. Pakistan is a key      Overemphasis of credit lines through govern-
strategic partner for many leading donors.           ment. Since the 1990s, the vast majority of
However, the measure of commitment to the            donor funds has come in the form of loans to
country seems to have been reduced to how            government for on-lending. Donors’ intention
much has been disbursed rather than how great        was to provide an important up-front invest-
an impact the funding has had. Measuring             ment to jump-start microfinance in Pakistan.


Unfortunately, they did not place enough            Coordination
emphasis on institutional capacity to absorb        Lack of donor coordination in programming. In
these large credit lines, and there was an imbal-   spite of progress made by the informal donor
ance between credit lines and TA. These large       group, there is still little coordination in actual
credit lines also hampered the emergence of         programming. As a result, many donors work on
local refinancing mechanisms and funding            parallel programs, each focusing on their own
markets.                                            priorities rather than aligning their respective
l    The availability of cheap credit serves as a   programs according to their and others’ compar-
     disincentive for savings. Very few MFPs        ative advantage. Developing programs in an
     try to develop savings services, because       uncoordinated manner may lead to further
     they are continuously relying on cheap         inefficiencies, especially now as a large number
     funds from donors.                             of donors show interest in funding TA and
                                                    many new programs are being designed.
l    Large credit lines crowd out both local and
     international commercial investors. Local
     and international investors consider the       Recommendations for Improving Donor
     Pakistani market too risky because of the      Systems
     prevalence of cheap funds.
                                                    The following recommendations are meant to
l    Retail-level institutions are complacent       help the donor community address the above
     and not keen to diversify their funding        challenges. These recommendations have seri-
     sources. MFPs tend not to be interested in     ous implications for how donors design, man-
     developing savings services as a means to      age, and monitor their programs. Some can be
     intermediate, and they have little incentive   undertaken directly by staff based in Pakistan,
     to seek funding from commercial banks          while others will require a much higher level
     because they are readily refinanced by         agency commitment, including possibly from
     wholesale funds and direct subsidized          management. CGAP is available to help funders
     credit lines.                                  implement these recommendations.
l    By channeling funds to GoP for develop-
     ing microfinance, donors often facilitate      Strategic Clarity/Vision
     public sector involvement in retail-level
     financial service delivery. This is not an     Adopt a financial systems approach to expanding
     appropriate role for governments. Para-        poor people’s access to sustainable financial
     doxically, there is more government            services. Much is known globally about what it
     involvement at the retail level in micro-      takes to adopt and implement a financial sys-
     finance than in the formal banking sector      tems approach. The Good Practice Guidelines
     in Pakistan.                                   for Funders of Microfinance (also known as
                                                    the “Pink Book”) provides a good starting point
Poor deployment of instruments. Although the
                                                    for donors in Pakistan to review their approach
choice of donor instrument for supporting
                                                    to funding microfinance.39 The informal donor
microfinance is not always ideal, neither is the
                                                    group could play a pivotal role in helping
actual use of the instruments chosen. Several
                                                    donors in the country develop a common vision
donors provide funds on the condition that
                                                    and joint “rules of the game” for funding micro-
institutions target specific regional areas or
                                                    finance as was done by the donor group in Sri
types of clients. Some donors inappropriately
                                                    Lanka following a CLEAR mission. These rules
intervene in institution management, to the
                                                    included, for example, to base funding decisions
extent of micromanaging salaries and staffing
                                                    on institutions’ plans to become sustainable and
numbers. In some cases, donors use procure-
                                                    insist on cost-recovery interest rates, etc.
ment rules that preclude MFPs from selecting
their own consultants.                              __________________________
                                                     Good Practice Guidelines for Funders of Microfinance,


Accountability for Results                               Instruments
Provide clear and strong incentives for achieving        Adapting the choice and use of instruments
sustainability and efficiency. Donors should use         deployed by donors working in Pakistan
performance-based contracts to ensure funding            requires serious political will.
is linked to performance against agreed-upon
                                                         Diversify use of instruments. Different MFPs
indicators in key areas, such as outreach, sus-
                                                         require different types of support and, accord-
tainability, and efficiency. Standards for such
                                                         ingly, funding instruments based on their
indicators already exist and are part of the Good
                                                         structure and stage of development. Moreover, a
Practice Guidelines for Microfinance Funders.
                                                         mix of funding instruments is appropriate for
In negotiating minimum performance indica-
                                                         various aspects of building the appropriate
tors, donors should prioritize institutions’ own
                                                         market infrastructure and promoting a sound
business plans and targets, not their own dis-
                                                         policy environment. As microfinance in
bursement requirements. Additionally, staff
                                                         Pakistan evolves from the start-up phase, flows
responsible for monitoring progress reports
                                                         of donor funds are still needed, but the quality
should possess the skills—or receive training—
                                                         of those flows will need to be different. Not
to interpret the results and take action if
                                                         every funder dollar, pound, or euro is equal! The
                                                         instrument, terms, and structure of donor funds
Be a reliable and consistent partner. Donors             make a big difference. Moreover, as micro-
must be consistent with the institutions they            finance becomes more commercial, donor sub-
support. They must respect their own policies            sidies will need to be increasingly strategic—
and commitments, including making timely dis-            which requires increased sophistication but not
bursements and communicating policy shifts as            necessarily increased amounts. Donors should
promptly as possible.                                    meet the market’s evolving needs with a wider
                                                         palette of instruments, such as grants, guaran-
Staff Capacity
                                                         tees, and equity. Vanilla credit lines are no
Engage financial-sector specialists for large            longer sufficient. Donors who do not have the
programs. Based on current and future needs of           appropriate instruments to meet the new needs
microfinance programs, management of leading             of the market may wish to cede their place to
donor agencies in microfinance in Pakistan               others. Strong donors of the past may not be
should ensure they have sufficient technical             strong donors of the future. In case some of the
staff in the country to manage portfolios while          funders have significant disbursement pres-
coordinating with others. Because microfinance           sures, they may want to reorient some of their
is a technically intensive area of development,          funding into other development sectors that
it would be appropriate to have at least one per-        require larger program size, such as infrastruc-
son at half time for each large program. Since           ture and social sectors.
the review last December, two key staff with
technical knowledge have moved to other                  Coordination
assignments.                                             Strengthen informal donor group on micro-
                                                         finance. Experience in other countries has
Train existing staff. At a minimum, donors
                                                         shown that solid coordination can play a sig-
should ensure that program managers responsible
                                                         nificant role in rationalizing support to the
for microfinance are “literate” in financial-
                                                         sector (e.g., Uganda, Nicaragua, and Cambodia).
sector development and have received appropri-
                                                         In Pakistan, there are a few principles that are
ate training because not every donor can afford
                                                         required for a well-functioning coordination
to have technical staff specialized in micro-
                                                         group. The donor group may want to do the
finance. Several options for short-term training
are available.40
__________________________                               l   Choose a lead agency with convening
   The Boulder Microfinance Training Program in Turin,       power, and make a commitment to have one
Italy (, and the CGAP/MFMI
donor training ( are two options.
                                                             staff member responsible for facilitating


     coordination, and have this responsibilty            branchless banking). The group should also
     clearly noted in their terms of reference.           look at broad financial-sector issues (agri-
l    Ensure that the largest funders are well             cultural/rural finance, housing finance, etc.).
     represented in the group and that their head      Key activities for the group could include keep-
     offices are involved when necessary (espe-        ing an updated list of donor projects involving
     cially in the case of centralized funders).       microfinance, discussing all new projects at an
l    Invite new types of microfinance funders          early stage, coordinating on operational support
     to join (e.g., social investors) to reflect the   (e.g., five donors support SBP), organizing joint
     evolution of the funding market.                  reviews, performing program appraisals, or con-
l    Work on specific issues. Collaboration            ducting a comparative advantage exercise.
     works best when members share common              CGAP is available to support the activities and
     interests on substantial issues (e.g., savings,   the development of this donor group.

                                                                                                   COUNTRY-LEVEL EFFECTIVENESS AND ACCOUNTABILITY REVIEW WITH A POLICY DIAGNOSTIC


                                               CHALLENGES                                                                 RECOMMENDATIONS FOR DONORS and GoP

                  • Weak institutional foundations for growth: most institutions are               • Insist on sustainability: support specialized MFPs and contractually insist providers charge cost-recovery
                    unsustainable and middle management capacity is weak                             interest rates
                  • Limited demonstration business model until recently: MFPs’ low interest        • Encourage innovation, new actors, and new approaches: create tenders to attract experienced
                    rates do not permit full cost recovery, especially because subsidies are         microfinance players (e.g., Greenfield); bring in investors that offer know-how, governance, and equity;
                    passed on to clients; some providers confuse microfinance with charity           promote mobile phone-based financial services; fund up-front investment costs of ICT, make use of

                  • Lack of responsiveness to clients: providers overwhelmingly offer the            existing physical infrastructure
                    same product and terms; deposit services largely undeveloped                   • Establish incentives for retail providers to diversify funding sources
                  • Donors funding conditions and current structure of PPAF, the leading           • Promote commercial wholesale market: spin-off PPAF lending operations and establish an “access to
                    apex, limit sustainable growth: no strict incentives for partners to recover     finance fund”; develop incentives/eliminate disincentives for commercial banks to lend to MFPs
                    their costs; blurring of social and financial services; rigid disbursement     • Create a multidonor TA facility: provide, demand-based, quality institutional development services in a
                    procedures                                                                       performance-based manner
                  •   Lack of top-notch quality training and TA                                    • Conduct action-oriented research on specific areas: results of research on key topics like savings and

                  •   Limited commercial wholesale market                                            potential players like Pak Post Savings Bank would benefit the industry
                                                                                                   • Continue support for PMN: “public good” services, i.e., transparency work, should be maintained
                                                                                                   • Understand the full range of organizations reaching poor and low-income people: obtain complete
                                                                                                     picture of the entire supply side
                  • Misunderstanding about microfinance by some relevant actors within             • SBP should focus on its core mandate of regulation and supervision: avoid making funding decisions
                    GoP: overstated expectations of microfinance as poverty alleviation              about providers it then has to supervise; improve dissemination on SBP’s policies, regulations, and
                    tool; limited awareness of good practice principles; unwillingness to            guidelines
                    openly address real costs of microcredit delivery                              • Refine regulatory framework: introduce more flexibility in loan size limit; change requirements that
                  • SBP risks overstretching mandate: promotional role could divert from             MFBs serve only poor people; adjust minimum capital requirements for district-level MFBs; establish
                    core function                                                                    conducive framework for branchless banking; subject Khushhali Bank to same treatments as MFBs;
                                                                                                     continue to require that NGOs wanting to collect voluntary savings from public be licensed

                  • Overall favorable regulatory framework has a few specific limitations
                    (see full report text)                                                         • Delineate government’s role as facilitator: base future strategies on full understanding of where poor
                  • Insufficient information on full scope of sector                                 people access financial services; be realistic about targets; avoid initiating government credit programs
                  • Inappropriate government intervention in credit delivery
                  • Strategic clarity/vision: lack of understanding of what financial system       • Strategic clarity/vision: treat microfinance as part of the financial system
                    development entails; poor knowledge about key drivers of sustainability        • Accountability for results: provide clear and strong incentives for achieving sustainability and efficiency
                  • Accountability for results: misplaced measure of success on                      in performance-based contracts; be a reliable and consistent partner
                    disbursements rather than performance; little performance-based                • Staff capacity: engage financial sector specialists for large programs; train existing staff
                    funding; funding is unpredictable
                                                                                                   • Instruments: adapt and diversify use of instruments to match evolving needs of some MFPs
                  • Staff capacity: over-reliance on a few technical staff
                                                                                                   • Coordination: strengthen informal donor group on microfinance
                  • Instruments: overemphasis on credit lines through government; use of
                    instruments is constraining to MFPs

                  • Coordination: Lack of donor coordination in programming


The figures in this annex illustrate the recent trends in outreach and sustainability of institutions that
provide financial services to the poor in Pakistan. The information presented is based on PMN figures
and research conducted by the review team.
PMN members come from a range of formal and semiformal institutions that are able to report to the
network regularly and are willing to share their data with other MFPs. In October 2006, PMN was
composed of four MFBs, five MFPs, four RSPs, three NGOs, and two CFIs.41 However non-PMN
members provide a majority of microfinance services (both credit and savings) in Pakistan. To account
for these institutions, the review team complemented PMN results with estimated outreach and
performance indicators, based on interviews and self-reporting mechanisms of non-PMN providers.
Loans. PMN members’ active borrowers represent 4 percent of the total population. During 2001–2005,
reporting members of PMN’s loan portfolios outstanding grew at a compounded rate of 60 percent per
annum, thus reaching approximately 640,000 active borrowers. Much of this growth occurred in
2003–2005 as MFBs (in particular Khushhali Bank) proceeded to grow to scale and Kashf Foundation
continued to enjoy rapid growth. RSPs (especially the National Rural Support Program) also continued
to grow. Despite this rapid growth, PMN’s overall share of microcredit activity is relatively small when
compared with the loan portfolio outstanding of non-PMN member microfinance services providers.
In contrast to the 60 percent compounded growth in the number of loans, the growth in the average
loan portfolio outstanding grew only at a 41 percent annual compounded rate over the same period,
which indicates that PMN members tended to make smaller loans over that period.
Although no formal monitoring of the entire sector exists, the review team estimated that the total
microloan portfolio outstanding as of 31 December 2005 was approximately 73 billion PRs (about
US$ 1.2 billion), consisting of about 1.4 million loans outstanding.42 As figures 2 and 3 indicate, PMN
members represent about 8 percent of loan portfolio outstanding, but approximately 45 percent of the
total number of loans outstanding. Furthermore, figures 2 and 3 highlight that ZTBL is the largest
lender to the micro and small loan sector in Pakistan, with approximately 81 percent of loan portfolio
outstanding, and 39 percent of total borrowers.

     Figure 2. Estimated National Microfinance Gross Loan Portfolio Outstanding per Type of Retail Institution 43

         Estimated National Gross Loan Portfolio Outstanding
                          2%         1%
                     2%                               8%
                                                                      MFPs reporting to PMN
                                                                      National Bank of Pakistan
                                                                      First Women's Bank
                                                                      Co-operative Banks <100K
                                                                      Microfinance Banks not members of PMN

     Source: Performance Indicators Report, PMN, Islamabad, 2005.
   These numbers are based on the assumption that all loans of less than 100,000 PRs (US$ 1,666) would be classified as micro-
finance loans (especially for input loans extended by ZBTL to the farming sector). This estimation is conservative because the
microloan ceiling has just been raised to 150,000 RPs by SBP. A further estimate was then made regarding the likely proportion
these loans represented compared with the total loans disbursed.
   Two categories of MFPs have less than 1 percent and are not represented in the figure (Orangi and PO Partners of PPAF that
are not members of PMN).


Fig 3Figure 3. Estimated Outreach: Number of National Microfinance Loans per Type of Retail Institution

                  % of total number of outstanding loans

                    3%       1%         2%                               MFPs reporting to PMN
                                                   1%      46%
             2%                                                          ZTBL
             6%                                                          National Bank of Pakistan
                                                                         First Women's Bank
                                                                         Cooperative Banks
                                                                         Orange Partners
                                                                         Partner Organizations of PPAF (not members of PMN)
             39%                                                         Microfinance Banks not members of PMN

Tab 1             Table 1. Growth in Gross Loan Portfolio of MFPs That Report to PMN (000 PRs)

                           2000               2001          2002                2003              2004               2005
 MFBs                              0                  0              0          737,669          1,610,150          2,344,414
 MFIs                       33,371            791,742       168,059             393,490              564,765         947,902
 RSPs                      203,195            638,195      1,030,723         1,123,083           1,283,599          1,706,761
 NGOs                       13,065              22,886       58,527             110,319              186,796         370,094
 CFIs                              0                  0     241,621             245,011              308,894         319,119
 Total                     249,631           1,452,823     1,498,930         2,609,572           3,954,204          5,688,290

Tab 2 1                                                                                                        46
                       Table 2.1. Growth in the Number of Loans of MFPs That Report to PMN

                           2000               2001          2002                2003              2004               2005
     MFBs                          0                  0             0            95,090           177,648            248,091
     MFIs                     7,444             16,855       40,800              93,122              99,441          132,867
     RSPs                     5,690             76,570      118,814             142,716           136,454            208,995
     NGOs                     2,372              5,108       11,252              21,251              26,282              40,913
     CFIs                          0                  0          6,147            8,648              11,336              12,552
     Total                   15,506             98,533      177,013             360,827           451,161            643,418

Although members of the PMN network have enjoyed steady growth over the past few years, they
offer only a partial view of the sector, especially in terms of gross portfolio outstanding.

  Source: PMN. In PIR, all except Network MF bank are PMN members. In the Microwatch non-PMN members that report to
us are Network MF bank, Pak Oman MF bank, Tameer MF bank, Save the Poor, Jinnah Welfare Society, Lachi Project, and
     PMN usually calls specialized NGOs “Specialized MFIs” in its reports.


                   Table 2.2. Microcredit Outreach of MFPs that Report to PMN Compared with
                                         Other Providers of Microcredit

                             PMN                  ZBTL                    NBP               Other              Total
Gross Portfolio
                             5,688,000          58,915,000                4,500,000         4,020,000         73,123,000
(‘000 RPs)
Number of
                               643,000              549,000                 90,000           139,000           1,421,000

Low levels of savings. In relation to the level of national savings by small savers, PMN members play
only a marginal role, with less than 5 percent of the estimated small savings accounts nationwide. The
largest deposit taker is Pakistan Post Office Savings Bank, with an estimated 78 percent of total
deposits mobilized, followed by ZTBL with approximately 9 percent market share. Growth in savings
mobilization by PMN members has lagged behind the growth rate of loans, having increased at an
annual compounded rate of 17.5 percent since 2001. Table 3 details the relatively low level of savings
mobilization by PMN members, primarily because of the low degree of interest in savings by MFBs.
For example, Khushhali Bank doesn’t provide saving services at all. The low savings volumes of
PMN members can be explained partly by the fact that a majority of PMN members are not legally
permitted to intermediate savings (with the exception of MFBs and CFIs). Nearly 50 percent of the
total savings mobilized by PMN members are held by First Microfinance Bank.

Table 3.                                                                                             48
                              Table 3. Volume of Savings by PMN Members (000 PRs)

                        2000               2001                2002              2003            2004            2005
     MFBs                         0                 0                 0          392,048         468,974         679,240
     MFIs                    1,463            6,540             20,613            11,860              8,541        7,894
     RSPs               481,721            696,367             912,358           496,457         541,869         646,941
     NGOs                10,570               8,854             10,592            94,159             13,222       20,494
     CFIs                         0                 0                 0                 0                 0             0
     Total              493,754            711,761             943,563           994,524       1,032,606       1,354,569

                                   Figure 4. Estimated National Microfinance Savings
Figure 4.                      (percentage of total volumes of savings by type of institutions) 49

               Estimated National Microfinance Savings

                             1%                5%
                        7%                                9%

                                                                           MFPs reporting to PMN
                                                                           ZTBL (total)
                                                                           Pak Post Bank
                                                                           Co-operative Banks <10K
                                                                           RSPs not reporting to PMN

Table 4.
     Source: CGAP CLEAR estimates (microloans below 100,000 RPs).
     Source: PMN.
 Five categories of MFPs have less than 1 percent and are not represented on the figure (National Bank of Pakistan, First

Women’s Bank, Orangi Partners, Partner Organizations of PPAF that are not members of PMN, MFBs that are not PMN members).


                      Table 4. Estimated number of savings accounts below 10,000 PRs
                                           (not including NSS)
                                   Institution                          Number of Accounts
                     Pak Post Savings Bank                                                  2,570,000
                     ZTBL                                                                     800,000
                     PMN                                                                      824,000
                     Cooperative Banks                                                        307,000
                     Other                                                                    130,000
                     Total                                                                  4,631,000

Table 4 shows the estimated number of national savings accounts with balances of less than 10,000 PRs
(about US$ 165) as of December 2005. Basic data for this statistic are scarce and do not include accounts
with NSS.
Decent geographical coverage. National coverage is extensive, largely thanks to the 13,419 post
offices throughout Pakistan, the 7,500 commercial bank branches (although some rural branches are
being closed), and the 343 ZTBL branches. In addition, geographical coverage is reinforced by the
existing network of RSPs. PMN members themselves provide a reasonable geographic coverage, with
services in approximately two-thirds of the 123 districts in the country. This concentration is heaviest
in provinces with the greatest population densities, with 442 outlets in Punjab (population 74 million),
220 outlets in Sindh (population 31 million), and 112 outlets in the North West Frontier (population
20 million). The province with the least penetration is Balochistan, which has the lowest population
density of all of the provinces and federal territories. The region where there is the greatest degree of
competition amongst PMN members is around Lahore, where Khasf Foundation, Khushhali Bank, and
several RSPs all compete.
Loan portfolio quality. Overall loan portfolio quality of PMN members, as measured by the portfolio
at risk greater than 30 days (PAR>30), has moved progressively closer to internationally accepted
levels despite reversals in 2002 and 2003. CFIs and RSPs have the poorest performance. The CFIs
results, representing less than 6 percent of the total portfolio outstanding, reflect the poor performance
of the Bank of the Khyber. This bank was founded by the provincial government, and its credit
policies and procedures have been subject to political influence; however, it is in the process of being
restructured. RSPs had a relatively high level of loans in arrears in 2002 (about 18 percent), but these
were progressively worked down in 2003 and 2004. The sharp decline in their PAR>30 ratio in 2005
was because of a high level of loan write-offs that were deemed uncollectible.
The loan portfolio of the other MFPs is worse than the portfolios of PMN members. The main lender,
ZTBL, with an estimated 81 percent share of total microfinance loans outstanding, has an estimated
loan in arrears rate of more than 50 percent. Anecdotal evidence and field interviews suggest that some
RFPs have significant portfolio quality issues.
Financial sustainability. The sustainability of institutions reporting to PMN has been disappointing,
with only two members reported to be operationally and financially sustainable (Khasf Foundation
and the Orangi Project). One reason for this is that the average yield on portfolio for all PMN
members is 18.8 percent, compared with an average yield for Asia of 30.7 percent. By comparison,
the yield on portfolio for Khasf Foundation is 28.5 percent. Conversely, the operating expense ratio of
all PMN members, at 22.4 percent, compares favorably with the Asian average of 22.8 percent.

     According to SBP, end of June 2005, there were 27m accounts and 5m accounts under 5000 PRs.


Table 5.                                                                    51
                                Table 5. Financial Self-Sufficiency Ratio (%)

       Category of
                     2000             2001          2002          2003           2004     2005
       MFBs                 0                0             0         56.2          44.9     53.2
       MFIs            78.1              78.7         109.1         105.0         136.6    114.1
       RSPs           131.2             105.2          95.3          85.0          77.0     62.6
       NGOs            37.1              57.6          45.3          45.8          69.9     60.7
       CFIs                 0                0         40.7          44.8         144.1     50.1

The impact of Khasf Foundation on the results of the MFP group is substantial, because it represents
more than 80 percent of the assets, and its adjusted net income more than offsets the accumulated
losses of other MFPs. The large swing in the performance of CFIs reflects changes relating to the
restructuring of the Bank of Kyber.
The profitability of many institutions that are not PMN members is highly questionable. Many of them
charge below-market rates (e.g., ZTBL lends at a net 8 percent). Together with poor loan repayment
rates, this means that many of them would be unprofitable if they reported in accordance with
generally accepted accounting principles.

     Source: PMN.



                                             Member     Supervised
                                                                            Legal Structure
                                             of PMN      by SBP
         Description of Entities
                                                                        Registered     Registered
                                            Yes   No    Yes    No    under Companies under Societies
                                                                        Ordinance    Registration Act

Microfinance Banks
First Microfinance Bank                      X           X                  X
Khushhali Bank                               X           X                  X
Network Microfinance Bank                          X     X                  X
Pak Oman Microfinance Bank                         X     X                  X
Rozgar Microfinance Bank                     X           X                  X
Tameer Bank Limited                                X     X                  X

Microfinance Institutions
Akhuwat                                      X                  X                            X
Al Falah Development Organization                  X            X                            X
Al-Madad Foundation                                X            X                            X
Al-Mehran Rural                                    X            X                            X
Anjuman Falaha-o-Behbood                           X            X                            X
Ashasha                                      X                  X           X
Bhaahn Beli                                        X            X                            X
Bhattai Welfare Association                        X            X                            X
Bukhari S.W. Association                           X            X                            X
Community Base Education                           X            X                            X
Community Development Concern                      X            X                            X
Community Support Concern                    X                  X                            X
Community Uplift Program                           X            X                            X
Development Action for Mobilization and
                                             X                  X                            X
Distagir C.C.C. Society                            X            X                            X
Goth Seengar Foundation                            X            X                            X
Human Development Foundation                       X            X           X
HWA Foundation                                     X            X                            X
Indus Community Development                        X            X                            X
Islamic Relief                                     X            X                            X
Jinnah Welfare Society                             X            X                            X
Kashf Foundation                             X                  X                            X
Khagi Cooperative                                  X            X                            X
Khuda Ki Basti                                     X            X                            X
Khwendo Kor                                        X            X                            X
Korangi Credit Society                             X            X                            X
Kurrum Rural Support Organization                  X            X                            X
LDC                                                X            X                            X
Marvi Rural Development Organization               X            X                            X
Marvi Social Cultural W. Association               X            X                            X
Mehran Educational                                 X            X                            X
Milap                                              X            X                            X
Narowal Rural Development Program                  X            X                            X

Continued on p. 40


                                             Member     Supervised
                                                                            Legal Structure
                                             of PMN      by SBP
           Description of Entities
                                                                        Registered     Registered
                                             Yes   No   Yes    No    under Companies under Societies
                                                                        Ordinance    Registration Act
Nojawanan Welfare Association                      X           X                             X
O.W.P.R.A.                                         X           X                             X
Orangi Pilot Project                         X                 X                             X
Organization for Participatory Development         X           X                             X
Organization for Participatory Environment         X           X                             X
Pak Social Welfare                                 X           X                             X
PFFF                                               X           X                             X
Poverty Eradication Network                        X           X                             X
Punno Aqil Welfare Forum                           X           X                             X
Rural Community Development Society                X           X                             X
Saath Development Society                          X           X                             X
SAFWCO (Sindh)                               X                 X                             X
SAHARA                                             X           X                             X
Sahkar Development Foundation                      X           X                             X
Save the Poor                                      X           X                             X
Shadab Rural Development                           X           X                             X
Shah Shal Sami Welfare Association                 X           X                             X
Shama Roshan                                       X           X                             X
SHEDS                                              X           X                             X
Sind Development Society                           X           X                             X
Sind Rural Partner Organization                    X           X                             X
Sindh Rural Support Programme                      X           X                             X
Singh Goth Suddar Foundation                       X           X                             X
Sofi Shah Inyat Shaheed                            X           X                             X
Soon Valley Development Program                    X           X                             X
Sorath Samaji Taraqiyati Tanz.                     X           X                             X
Sujak Samudi Welfare Association                   X           X                             X
Swabi Women Welfare Society                        X           X                             X
Taraqee Foundation                           X                 X                             X
Trust for Rural Development                        X           X                             X
Village Welfare Society                            X           X                             X
Women Welfare Organization Poonch                  X           X                             X
Young Samaji Tanzeem                               X           X                             X

Rural Service Providers
Aga Khan RSP                                       X           X            X
Balochistan RSP                                    X           X            X
Ghazi Barotha Taraquati                            X           X            X
Lachi Poverty Reduction                            X           X            X
National RSP                                 X                 X            X
Punjab RSP                                   X                 X            X
Sarhad RSP                                   X                 X            X
Sindh Graduates Association                        X           X                             X
Sindh RSO                                          X           X            X
Thardeep RDP                                 X                 X            X



                            Banks                               Non-Banks

  Regulatory                                    Various provincial
                             SBP              Registration Authorities

                      Banking                   Societies      Companies
                                     MFI                                    Companies   Insurance
  Main Law           Companies
                                              Registration /   Ordinance,
                                                                            Ordinance   Ordinance
                     Ordinance                 Trusts Act      Section 42

  Institutional                                                                         Insurance
                     Banks         MFBs             NGOs/RSPs               NBFCs         Comp.



PPAF was founded by the GoP in 1997 as an apex institution to act as a wholesaler of funds to civil
society organizations. Its initial capital was in the form of an endowment from the GoP, the proceeds
of which have been invested in government securities. Subsequent funding for its activities comes
from a variety of donors and lenders, including the World Bank and IFAD, and from retained
PPAF works with those societies whose target markets are the poor rural and urban communities of
Pakistan. PPAF places a special emphasis on meeting the needs of women in these areas. Its overall
goals and objectives are as follows:
l      To empower the poor, and to increase their incomes
l      To provide credit to PPAF’s partner organizations (the civil societies), and to help them expand
       their microfinance programs
l      To provide grants and loans on a cost-sharing basis for the development of small-scale
       community infrastructure projects
l      To create and enhance the access of disadvantaged communities to health and education services
l      To strengthen the capacity of partner organizations
These goals and objectives are achieved through four core components:
l      The Credit and Enterprise Development Component, which manages microfinance activities
l      The Community and Physical Infrastructure Component, which oversees the building of health
       and education infrastructures at the community level
l      The Human and Institutional Development Component, which provides capacity building and
       training to partner organizations
l      The Social Sector Development Component, which provides health and educational services at
       the community level
Although PPAF is a poverty alleviation fund, its largest activity is the provision of microfinance
services. For the financial year ending June 2006, its total disbursements was 6,205 million PRs (US$
103 million), of which 3,705 million PRs (US$ 61.7 million), or 59 percent, was for microfinance.
Moreover, funding available through the Microcredit Loan Fund (financed by grants and loans
provided through the GoP by IDA), totals 10,513 million PRs (US$ 175 million). As of 30 June 2006,
the microcredit loans outstanding to 39 MFPs amounted to 4,013 million PRs (US$ 66.9 million),
representing 30 percent of total assets. Of these loans, the largest borrower is the National Rural
Support Program, with a loan outstanding of 1,751 million PRs (US$ 29.2 million).
PPAF currently lends to its partner organizations at an interest rate of 8 percent, and it takes collateral
in the form of the loan portfolio and the other assets that are created by the loan itself. Concurrent with
the loan, PPAF also provides an operating subsidy to the partner organization equal to 10 percent of
the loan amount. Traditionally, it has enjoyed a high-quality portfolio, with a loan repayment rate of
100 percent.
PPAF has a strong balance sheet, with investments and savings accounts amounting to 48 percent of
total assets. It is highly profitable, recording gross income for FY 6/2006 of 761.5 million PRs
(US$ 12.7 million), with income from its substantial investment portfolio comprising 423.8 million
PRs (US$ $7.1 million) of this amount. Net income for the year was 501 million PRs (US$ 8.35
million). For the 12 months ending June 2006, the overall return on equity was 34 percent, and the
return on assets was 5 percent.52
     These data were sourced primarily from the PPAF Web site and its most recent annual report.




- ADB funded the establishment of Khushhali Bank, supports the restructuring of ZTBL, and set
  up a fund for district-level MFBs working in rural areas
- AECI set up a Spanish Microcredit Fund that provides hard currency refinancing and TA to
  eligible MFPs
- DFID provided grants and loan capital to Kashf Foundation and to MFPs in NWFP
- EC funds the development of MIS for MFPs and provides capacity building for MFPs to give
  them access to new sources of funding
- IFC supported the establishment of a greenfield MFB (Tameer Bank) with TA, loans, and equity
- IFC (jointly with CGAP) funds a market study on mobile banking and provides TA for product
  development and training for branch managers
- IFC provided equity capital for First MicroFinance Bank
- SDC funds capacity building of six MFPs and one MFB
- SDC supports four leasing companies in their efforts to serve the MSE sector
- UNDP provides TA for a state bank (First Women Bank), an MFB (First MicroFinanceBank),
  and a leasing company (Orix Leasing) with a special focus on microcredit for women
- USAID supports Khushhali Bank in increasing its outreach in remote areas (Balochistan, Sindh,
  and Federally Administered Tribal Areas)
- USAID provides support to financial institutions that serve the “missing middle” (loans ranging
  from $500 to $30,000) (implemented by ShoreBank Advisory Services)
- USAID works with PPAF to cater to the needs of entrepreneurs that have outgrown traditional


TA and refinance support
- DFID supports PMN
- DFID, SDC, and the World Bank provide funding for the Access to Finance Study (following the
  FinMark model)
- EC provides support in the training sector by funding the Centre of Excellence and by developing
  a certification course for microfinance bankers (in cooperation with IBP and NIBAF)
- EC provides funding for Orangi Charitable Trust as a wholesale lender
- IFAD funds the creation of an innovation facility within the Pakistan Poverty Alleviation Fund to
  enable the funding of innovations in microfinance
- SDC supports the Leasing Association of Pakistan, a training organization (Centre of
  Excellence), PMN, and two regional networks
- The World Bank provides loans and grant funding to the PPAF, an apex institution refinancing
  MFPs and providing grants for small-scale infrastructure projects


- ADB supported the adoption of the new regulatory framework for MFBs and established various
  microfinance funds (Microfinance Social Development Fund, Risk Mitigation Fund, Deposit
  Protection Fund)
- SDC funds capacity building for SBP in microfinance regulation and supervision

                                 Note that this list is not exhaustive.


This table illustrates the type of funding instruments funders use in Pakistan to support microfinance.





 Project type
 Stand alone                                          x      x      x          x     x     x      x       x
 Microfinance component                        x                    x     x                x      x
 Level of financial system
 Micro                                                x      x      x     x    x     x     x      x       x
 Meso                                          x                    x     x          x     x      x
 Macro                                                                    x          x     x      x
 Grants for TA to/through
 Retail institutions (NGO or private)                        x      x     x    x     x            x       x
 Government-owned retail institutions                                     x
 Government, other (incl. PIUs)                                           x          x
 Networks/training institutes                                       x     x    x     x            x
 Apexes/wholesale facilities                   x                          x                       x
 Umbrella projects/multidonor projects                                    x    x
 Grants for capital to/through
 Retail institutions (NGO or private)                               x          x                  x
 Government-owned retail institutions
 Government, other (incl. PIUs)
 Networks/training institutes                                       x
 Apexes/wholesale facilities
 Umbrella projects/multidonor projects
 Loans for TA to/through
 Retail institutions (NGO or private)                 x                                                   x
 Government-owned retail institutions
 Government other (incl. PIUs)                                                             x
 Apexes/wholesale facilities                          x
 Umbrella projects/multidonor projects
 Loans for capital to/through
 Retail institutions (NGO or private)                 x                        x     x
 Government, other (incl. PIUs)                                                            x
 Apexes/wholesale facilities                   x      x
 Umbrella projects/multidonor projects
 Equity to/through
 Retail institutions (NGO or private)                                          x
 Guarantees to/through                   All data are self-reported.
 Retail institutions (NGO or private)

                                         All data are self-reported.



                                   Microfinance funding per donor (in US$)
             (Stand-alone microfinance projects and microfinance components of integrated projects)

                Commitments for            Microfinance           Disbursed funding for            Projected Microfinance
                 microfinance             disbursements         microfinance in fiscal year       commitments 2006–2010
                           54                        55                       56                                      58
                  2000–2005                2000–2005                     2005                        (approved or not)
      WB             169,000,000              148,000,000                      24,000,000                       45,000,000
     IFAD                          0                       0                                  0                 13,200,000
     UNDP                1,680,100                  1,344,000                        170,600                       396,000
                                                           59                              60                             61
     DFID                7,125,600             7,109,200                            442,900                    80,385,900
                                 62                                                        63                             64
      EC              1,501,600                      174,100                        174,100                     1,619,200
      IFC                4,353,000                  4,353,000                       1,453,000       8,800,000–13,800,000
                                                           66                              67                             68
     SDC                 4,166,400             4,020,300                       1,427,400                        3,966,100
                                 69                        70
     ADB           330,000,000              223,000,000                             5,373,000                   82,000,000
     USAID               9,000,000                  8,600,000                       3,800,000                   13,300,000

     Total           526,826,700              396,600,600                      36,841,000         248,667,200–253,667,200

                                                    All data are self-reported.

     All figures are rounded to the next hundred.
     All the money budgeted for microfinance for this period of time (2000–2005).
     The average exchange rate for six years was used (2000–2005).
     Average exchange rate 2005.
     That is: “How much money does your agency plan to spend after 31 December 2005 for microfinance?”
     Current exchange rate (February 2007).
     US$ 1 = 0.662 GBP.
     US$ 1 = 0.550 GBP.
     US$ 1 = 0.513 GBP, amount depending on Access to Finance Programme (£30–40 million).
     US$ 1 = 0.959 EUR (average exchange rate 2000–2005).
     Exchange rate for 2005 (all disbursements in 2005): US$ 1 = 0.804 EUR.
     EC has an upcoming programming exercise in 2007. US$ 1 = 0.768 EUR.
     US$ 3,700,000 have already been disbursed in 2006.
     US$ 1 = 1.460 CH.
     US$ 1 = 1.245 CHF.
     Future commitments depend on the outcome of planned external reviews of all projects in 2007. US$ 1 = 1.236 CHF.
     1.23 billion PRs for Area Development Programmes in NWFP not included in this figure.
  This is money disbursed by ADB to the government, but much of it is still sitting somewhere (i.e., no disbursements yet from
New Bank Fund).



- Asian Development Bank. 1957 33271. “Strengthening Regulation, Enforcement, and
  Governance of Nonbank Financial Markets Loan Pakistan Finance.” 3,000,000. Islamabad,
  Pakistan, 5 December 2002.
- Asian Development Bank. 3650 34329. “Institutional Strengthening of the State Bank of Pakistan
  Technical Assistance Pakistan Finance.” 450,000. Islamabad, Pakistan 23 April 2001.
- Asian Development Bank. “Pakistan 2005 Earthquake: Preliminary Damage and Needs
  Assessment.” Asian Development Bank and World Bank, Islamabad, Pakistan, November 2005.
- Asian Development Bank. “Pakistan: Country Strategy and Program Update 2006–2008.”
  Islamabad, Pakistan, August 2005.
- Awais Butt, M. “European Commission Study on the Pakistan Financial Sector Reform.”
  Islamabad, Pakistan: European Commission, November 2003.
- Business and Finance Consulting Services. “Pakistan Financial Sector Study.” Islamabad,
  Pakistan: KFW Bank, June 2005.
- Government of Pakistan Finance Division Director General (Debt Office)/ E.A. “Highlights of
  the Economy and Federal Budget 2006–7.” Islamabad, Pakistan, 2006. Unpublished document.
- Government of Pakistan. “Terms of Reference for a Study on the Potential Social and Poverty
  Impacts of Microfinance Policies in Pakistan.” Islamabad, Pakistan, 2005.
- International Fund for Agriculture Development. “Microfinance Innovation and Outreach
  Programme: Report and Recommendation of the President.” Rome, December 2005.
- International Fund for Agriculture Development. “Microfinance Innovation and Outreach
  Programme: Design Document—Formulation, Main Report and Appendices.” Islamabad,
  Pakistan, June 2005.
- International Fund for Agriculture Development. “Microfinance Innovation and Outreach
  Programme: Inception Report, Main Report and Appendices.” Islamabad, Pakistan, March 2005.
- Ahmad, Jameel. “Fit & Proper Criteria for Board Members and President/Chief Executive of
  Microfinance Banks.” Karachi, Pakistan: State Bank of Pakistan, 2005.
- Ledgerwood, J., and Victoria White. “Transforming Microfinance Institutions: Providing Full
  Financial Services to the Poor.” Washington, D.C.: World Bank and MicroFinance Network,
  August 2006.
- Llanto, Gilberto M., et al., eds. “The Role of Central Banks in Microfinance in Asia and the
  Pacific.” Manila, the Philippines: Asian Development Bank, 2002.
- Ministry of Economic Affairs and Statistic. “Donor Conference Pakistan 2005: Reports and other
  documents.” Islamabad, Pakistan, 2005.
- Ministry of Economic Affairs and Statistic. “Pakistan Development Forums.” Islamabad,
  Pakistan, 2005–06.
- Ministry of Finance. “Accelerating Economic Growth and Reducing Poverty: The Road Ahead.”
  Poverty Reduction Strategy Paper. Karachi, Pakistan: Ministry of Finance, Poverty Reduction
  Strategy Paper Secretariat, December 2003.
- Moser, Lauren. “ShoreBank Advisory Services. Technical Proposal.” Widening Harmonized
  Access to Microfinance. Islamabad, Pakistan: United States Agency for International
  Development, February 2005.
- Pakistan Informal Microfinance Donor Group—Meetings Minutes. Islamabad, Pakistan.
  November 2006. Unpublished document.
- Rosenberg, Richard. Presentations of microfinance training for SBP staff. Karachi, Pakistan,
  2005. Unpublished document.


- ShoreBank Advisory Services. “3rd Quarterly Report, Widening Harmonized Access to
  Microfinance.” Islamabad, Pakistan: United States Agency for International Development,
  January 2006.
- State Bank of Pakistan. “Application for Establishing Microfinance Banks/Institutions under
  Microfinance Ordinance 2001.” Karachi, Pakistan, 2001.
- State Bank of Pakistan. “Criteria And Conditions for Grant of License for Establishing
  Microfinance Banks/Institutions.” Karachi, Pakistan, 2006.
- State Bank of Pakistan. “Forms / Documents for Accessing the New Bank Fund.” Karachi,
  Pakistan, 2006.
- State Bank of Pakistan. “Guidelines for Commercial Banks to Undertake Microfinance
  Business.” Karachi, Pakistan, 2006.
- State Bank of Pakistan. “Guidelines for Livestock Financing.” Karachi, Pakistan, August 2006.
- State Bank of Pakistan. “Guidelines for Mobile Banking Operations of Microfinance Banks/
  Institutions.” Karachi, Pakistan, 2003.
- State Bank of Pakistan. “Guidelines for Reviewing Credit Portfolio of NGO-MFPs Interested in
  Transformation into MFBs.” Karachi, Pakistan, 2006.
- State Bank of Pakistan. “NGO Transformation Guidelines.” Karachi, Pakistan, 2005.
- State Bank of Pakistan. “Prudential Regulations for Microfinance Banks/Institutions.” Karachi,
  Pakistan, 2006.
- State Bank of Pakistan. “Implications of Liberalizing Trade and Investment with India.” Karachi,
  Pakistan: Research and Economic Policy Departments, 2004.
- Stephens, B., et al. “Performance and Transparency: A Survey of Microfinance in South Asia.”
  Washington, D.C.: Microfinance Information eXchange, Inc., January 2006.
- Swiss Agency for Development and Cooperation. “Project Document: State Bank Partnership for
  Microfinance 2003–06 for Building Microfinance Related Capacity.” Islamabad, Pakistan, 2002.
- Wijesiriwardana, Indrajith, Rabia Khan, and Hansruedi Pfeiffer. “External Review of Financial
  Sector Strengthening Programme, Phase I.” Berne, Switzerland, Swiss Agency for Development
  and Cooperation, May 2005.
- World Bank Group. “Pakistan at a Glance.” Washington, D.C., 15 September 2006. Unpublished
- World Bank. “Pakistan—Banking Sector Development Policy Program—Implementation
  Completion Report.” Islamabad, Pakistan, January 2006.
- World Bank. “Pakistan—Country Assistance Strategy Progress Report.” Washington, D.C., April
- World Bank. “Pakistan—Financial Sector Assessment.” Washington, D.C., March 2005.

Laws, Regulations, and Guidelines
-   Banking Act (draft), 2006.
-   Banking Companies Ordinance, 1962.
-   Branch Licensing Policy for Banks and DFIs, 2001.
-   Branch Licensing Policy for Microfinance Institutions, 2002.
-   Companies Ordinance, 1984.
-   Guidelines for Commercial Banks to Undertake Microfinance Business, 2006.
-   Guidelines for Mobile Banking Operations of Microfinance Banks/Institutions.
-   Micro-Finance Bank Ordinance, 2000.
-   Microfinance Institutions Ordinance, 2001 (as amended in 2006).
-   NGO/RSPs/Cooperatives Transformation Guidelines.
-   Prudential Regulations for Microfinance Banks / Institutions.
-   State Bank of Pakistan Act, 1956.
-   The Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003.


-    Pakistan Microfinance Network. “Performance Indicators Report.” Islamabad, Pakistan, 2005.
-    PPAF. PPAF Annual Report 2005. Islamabad, Pakistan, 2005.
-    World Bank. “PPAF Project Appraisal.” Report No. 27176. Washington, D.C., October 2003.
-    World Bank. “PPAF, Updated Project Information Document.” Report No. 34261. Washington,
     D.C., July 2005.

- ACCION International. “Kashf Foundation-Institutional Assessment and Transformation Plan.”
  Islamabad, Pakistan: Financial Sector Strengthening Programme, Swiss Agency for Development
  and Cooperation, October 2005.
- Asian Development Bank. 0954. “Study of the Federal Bank for Cooperatives Technical
  Assistance Pakistan Finance.” 350,000. Islamabad, Pakistan, February 1988.
- Asian Development Bank.1805 29229. “Microfinance Sector Development Program—Program
  Loan, Pakistan Finance.” 70,000,000. Islamabad, Pakistan, December 2000.
- Asian Development Bank. 1806 29229. “Microfinance Sector Development Program—Project
  Loan, Pakistan Finance.” 80,000,000. Islamabad, Pakistan, December 2000.
- Asian Development Bank. 1987 36075. “Rural Finance Sector Development Program—Project
  Loan, Pakistan Finance.” 225,000,000. Islamabad, Pakistan, December 2002.
- Asian Development Bank. 1988 36075. “Rural Finance Sector Development Program—Project
  Loan, Pakistan Finance.” 25,000,000. Islamabad, Pakistan, December 2002.
- Ford Rhodes Sidat Hyder & Co. “National Rural Support Programme: Final Report—
  Institutional Assessment Study for the Proposed Microfinance Bank, Financial Sector.
  Strengthening Programme.” Islamabad, Pakistan: Swiss Agency for Development and
  Cooperation, June 2005.
- Ford Rhodes Sidat Hyder & Co. “National Rural Support Programme: Business Plan—Financial
  Projections, Financial Sector Strengthening Programme.” Islamabad, Pakistan: Swiss Agency for
  Development and Cooperation, June 2005.
- Japan Fund for Poverty Reduction. “Microfinance for the Poorest in Pakistan—Grant.” Manila,
  the Philippines: Asian Development Bank, 2006.
- K-Rep Advisory Services. Africa Limited. “National Rural Support Programme—Assessment of
  the Governance Structure and Human Resources, Financial Sector Strengthening Programme.”
  Islamabad, Pakistan: Swiss Agency for Development and Cooperation, June 2005.
- Qadir, A. “A Study of Informal Finance Markets in Pakistan.” Islamabad, Pakistan: Pakistan
  Microfinance Network, November 2005.
- Sihna, Sanjay. “Micro-Credit Ratings International Ltd. Development Action for Mobilization
  and Emancipation.” Lahore, Pakistan: Pakistan Microfinance Network, Department for
  International Development, April 2006.
- Sihna, Sanjay. “Micro-Credit Ratings International Ltd. Thardeep Rural Development
  Programme.” Mithi, Tharparker, Pakistan: Pakistan Microfinance Network, Department for
  International Development, April 2006.
- Swiss Agency for Development and Cooperation. “Pakistan Financial Sector Strengthening
  Programme.” Bern/Islamabad, 6 December 2005.
- Swiss Agency for Development and Cooperation. “Financial Sector Strengthening Programme,
  Project Document-Phase II, January 2006–December 2008.” Islamabad, Pakistan, November
- Swiss Agency for Development and Cooperation. “Financial Sector Strengthening Programme,
  Logical Framework Matrix—Phase II, January 2006–December 2008.” Islamabad, Pakistan,
  October 2005.


- Swiss Agency for Development and Cooperation. “Pakistan: Leasing to Micro and Small
  Enterprises, Credit Proposal—Phase III (1st October 2003 to 30th September 2007).” Islamabad,
  Pakistan, August 2003.
- Swiss Agency for Development and Cooperation. “Pakistan: Leasing to Micro and Small
  Enterprises, Logical Framework—Phase III (1st October 2003 to 30th September 2007).
  Islamabad, Pakistan, August 2003.
- United Nations Development Programme. MoU for the “Women Access to Capital and
  Technology Project” with the First Microfinance Bank Limited and Orix Leasing Pakistan
  Limited, March 24, 2005–March 23, 2006. Islamabad, Pakistan, March 2005.
- United Nations Development Programme. “Project Document: Women Access to Capital and
  Technology 1997–2006, Sub-Substantive Revision, NEX: First Women Bank Limited.”
  Islamabad, Pakistan, January 2003.

Aid Effectiveness
- CGAP. Good Practice Guidelines for Funders of Microfinance, 2nd edition. Washington, D.C.,
  October 2006.
- Duflos, Eric, Brigit Helms, Alexia Latortue, and Hannah Siedek. “Global Results: Analysis and
  Lessons.” CGAP Aid Effectiveness Initiative. Washington, D.C.: CGAP, 2004.
- Flaming, M. “Guaranteed Loans to Microfinance Institutions: How Do They Add Value?” Focus
  Note 40. Washington, D.C.: CGAP, January 2007.
- Helms, Brigit, and Alexia Latortue. “Elements of Donor Effectiveness in Microfinance: Policy
  Implications.” Aid Effectiveness Initiative. Washington, D.C.: CGAP, 2004.
- Cook, Tamara, with input from CGAP staff. “Maximizing Aid Effectiveness in Microfinance.”
  Donor Brief 22. Washington, D.C.: CGAP, February 2005.

- Christen, Robert Peck, Richard Rosenberg, and Veena Jayadeva. “Financial Institutions with a
  Double Bottom Line: Implications for the Future of Microfinance.” Occasional Paper 8.
  Washington, D.C.: CGAP, July 2004.
- Franco-Rodriguez, Susana, Olivier Morrissey, and Mark McGillivray. “Aid and the Public Sector
  in Pakistan: Evidence with Endogenous Aid.” World Development, 26 (7):1241–50, 1998.
- Government of Pakistan Planning Commission. “The MTDF 2005-10: An Overview.” Islamabad,
  Pakistan, 2005.
- Kemal, A. R. “Structural Adjustment, Macroeconomic Policies, and Poverty Trends in Pakistan,
  Asia and Pacific Forum on Poverty: Reforming Policies and Institutions for Poverty Reduction.”
  Manila, the Philippines: Asian Development Bank, 5–9 February 2001.
- World Bank and Independent Evaluation Group. “Pakistan: An Evaluation of the World Bank’s
  Assistance.” Washington, D.C., 2006.

Research Studies/Surveys
- Asian Development Bank. “Microfinance in Pakistan: A Poverty Impact Study of the Khushhali
  Bank.” Islamabad, Pakistan, 2005.
- Center of Excellence in Microfinance/Institute of Management Sciences, Peshawar. “Causes of
  Delinquency.” Peshawar, Pakistan: Financial Services Sector Reform Programme and Financial
  Sector Strengthening Programme, 2006.
- Hussien, Maliha, and Sazreh Hussain. “The Impact of Micro Finance on Poverty and Gender
  Equity; Approaches and Evidence.” Islamabad, Pakistan: Pakistan Microfinance Network,
  December 2003.


- Kashf Foundation. “Market of Microfinance; Analysis of the Punjab.” Lahore, Pakistan: Kashf
  Foundation, May 2006.
- Noor, Fazal. “Civil Society Human and Institutional Development Programme. Causes of High
  Rate of Drop-out amongst MicroFinance Borrowers, Pakistan Financial Services Sector Reform
  Programm.” Islamabad, Pakistan: European Commission, 2006.
- Oxford Policy. “Poverty and Social Impact Assessment: Pakistan Microfinance Policy.”
  Management Inception Report. London, United Kingdom: DFID, January 2006.
- Pakistan Microfinance Network. “The Microfinance Spotlight.” Islamabad, Pakistan, July 2006.
- Pakistan Microfinance Network. “The Demand for Microinsurance in Pakistan.” Islamabad,
  Pakistan, March 2006.
- Pakistan Microfinance Network. “A Recent Analysis on Amendments to MFI Ordinance 2001.”
  Islamabad, Pakistan, 2006.
- Pakistan Microfinance Network. “Microfinance Performance in Pakistan 1999–2005: Growth but
  a Structural Flaw Persists.” Islamabad, Pakistan: Pakistan Microfinance Network and ShoreBank
  Int., 2006.
- Pakistan Microfinance Network. “Position Paper # 1: Regulating Microfinance.” Islamabad,
  Pakistan, November 2002.
- Rasmussen, Stephen, and Greg Chen. “Emerging Issues for National Microfinance Associations.”
  Islamabad, Pakistan: Pakistan Microfinance Network and ShoreBank Int., August 2005.
- Seible, Hans Dieter. “Islamic Microfinance in Indonesia.” Eshborn, Germany: Deutsche
  Gesellschaft für Technische Zusammenarbeit GmbH, 2005.
- ShoreBank Int. “How Big Is the Microfinance Market in Pakistan: Estimates of Demand.”
  Islamabad, Pakistan, 2006.
- ShoreBank International. “10 Years of Microfinance.” Islamabad, Pakistan, 2006.
- The Central Bank of the Republic of Indonesia. “The Blueprint of Islamic Banking Development
  in Indonesia.” Jakarta, Indonesia, September 2002.
- Timberg, Thomas. “A Case Study. Risk Management: Islamic Financial Policies; Islamic Banking
  and Its Potential Impact.” Washington D.C., Nathan Associates, Inc., USAID, 2002.
- Zaidi, S. Akbar. “Microcredit for Development Orangi Pilot Project.” Karachi, Pakistan: OPP-
  RTI, 2003.



      Organization             Last Name        First Name           Title                            Email


Earthquake Reconstruction
                               Chaudary        Liaqat         Chairman                Not available
and Rehabilitation Authority

                                                              Advisor to Prime
Ministry of Finance            Shah            Salman                       

                                               Muhammad       Senior Joint
Ministry of Finance            Hussain                                      
                                               Iqbal          Secretary

Ministry of Women
                               Mahmood         Salim          Secretary               Not available

Securities & Exchange
                               Shaheen         Nazir          Executive Director      Not available
Commission of Pakistan

Securities & Exchange
                               Chaudary        Naveed         Director      
Commission of Pakistan

Securities & Exchange
                               Saeed           Akif           Executive Director
Commission of Pakistan

Securities & Exchange
                               Sufi            Shoaib         Director      
Commission of Pakistan

State Bank of Pakistan         Akhtar          Shamshad       Governor                Not available

State Bank of Pakistan         Ahmed           Jameel         Executive Director

State Bank of Pakistan         Ashraf Khan     Muhammad       Director, SMED          Not available

State Bank of Pakistan         Siddique        Saeed          Project Manager

State Bank of Pakistan         Iqbal           Amjad          Joint Director

State Bank of Pakistan         Ali             Syed Mansoor   Joint Director

                                                              Advisor to
State Bank of Pakistan         Said            Pervaiz                      

State Bank of Pakistan         Shafqat Mufti   Mahmood        Joint Director

State Bank of Pakistan          Nawaz          Qasim          Director      

State Bank of Pakistan         Ali             Syed Irfan     Director      

State Bank of Pakistan         Ahmad           Qazi Shoaib    Junior Joint Director

State Bank of Pakistan          Hussain        Inayat         Director      

State Bank of Pakistan          Khokhar        Zulfiqar       Joint Director

                                                              Advisor to the
State Bank of Pakistan          Kureshi        Azhar                        

State Bank of Pakistan         Khan                           Assistant Director

State Bank of Pakistan         Akram Bakshi    Kamaran        Joint Director

State Bank of Pakistan         Rahim           Abdul          Junior Joint Director   Not available


      Organization           Last Name    First Name          Title                          Email


                                                       Principal Financial
 Asian Development Bank      Rogers      Julie                     
                                                       Sector Specialist

 Asian Development Bank      Lewis       Sukanda       Financial Economist

 Asian Development Bank      Hashimi     Azim          Implementation

 Department for
                             Sharif      Haroon        Economic Adviser
 International Development

                                                       Head of Delegation
 European Commission         Benz        Balthasar                 

 European Commission         Ara         Roshan        Program Officer

 International Finance                                 Senior Investment
                             Muzaffar    Ayesha                    
 Corporation                                           Officer

 International Fund for                                Country Program
                             Brett       Nigel                     
 Agriculture Development                               Manager

 International Fund for
                             Johanson    Horward       Consultant  
 Agriculture Development

 International Fund for
                             Hussain     Maliha        Consultant            Not available
 Agriculture Development

 International Labour
                             Li          Donglin       Director    

 International Labour                    Dr. Tauqir    National Project
 Organization                            Hussien       Coordinator

 Japan Bank for
                             Chiyo       Mamiya        Consultant  
 International Cooperation

Swiss Agency for                                       Deputy Country
                          Kohli          Richard                   
Development & Cooperation                              Director

Swiss Agency for
                          Bugnard        Denis         Country Director
Development & Cooperation

Swiss Agency for
                          Bokharey       Kanwal        Program Officer
Development & Cooperation

                                                       Assistant Resident
 United Nations
                             Effendi     Faiza         Chief Poverty
 Development Programme
                                                       Reduction and
                                                       Gender Unit

 United Nations
                             Xu          Haoliang      Country Director
 Development Programme

 United Nations
                             Khattak     Rabia         Program Officer
 Development Programme

 United States Agency for                              Economic Growth
                             Meyer       Amy                       
 International Development                             Office Director

 United States Agency for                              Economic Growth
                             Qazi        Farid                     
 International Development                             Specialist


      Organization          Last Name    First Name           Title                           Email

                                                       Lead Specialist
World Bank                 Rasmussen    Stephen F.                  
                                                       Social Development

World Bank                  Wall        John           Country Director

                                                       Senior Community
World Bank                  Isa         Qazi Azmat     Development  

                                                       Private Sector
World Bank                  Khan        Isfandyar      Development  

Projects (Supported by Donors)

Financial Sector
Strengthening               Nawaz       Khalid         Project Director
Programme, SDC

Pakistan Financial                                                   /
                                        Mohammad       Microfinance
Services Sector Reform      Butt                                              muhammad.awais@plan-
                                        Awais          Expert
Programme, EC                                                       


Agency for Technical
                                                       Deputy Country
Cooperation &               Yaqobi      M. Mahir                     

Bangladesh Rural
                                        Md. Mahfuzul   Coordinator - Social
Advancement                 Chowdhury                               
                                        Bari           Development

                                                       Senior Program,
Islamic Relief              Hasan       Shazia                      
                                                       Officer Microfinance

Islamic Relief              Jedrashv    Shpend         Program Officer        Not available

                                                       Assistant Program
Islamic Relief              Ghaffar     Abdul                                 Not available

Plan International -                                   Microfinance           nasim.sherin@plan-
                            Sherin      Nasim
Pakistan Office                                        Advisor      

                                                       Asst. Manager
Save the Children, USA      Gillani     Kashif                      
                                                       Grants Compliance

                                                       Deputy Country
Save the Children, USA      Aziz        Babar          Director Finance &

Development Banks/ Commercial Banks/ Leasing Companies

Adamjee Insurance                                                             shaila.hussain@
                            Hussain     Shaila         Joint Senior
Company Limited                                                     

Adamjee Insurance                                      Deputy General
                            Jabbar      Asif                        
Company Limited                                        Manager

Adamjee Insurance
                            Naseem      Imran          Deputy Manager
Company Limited

Adamjee Insurance                       Captain        Senior General
Company Limited                         Mahmood        Manager


       Organization           Last Name    First Name          Title                         Email

 Crescent Leasing                                       Senior Vice
                              Rizvi       Shah Nawaz               
 Corporation Limited                                    President

 First Microfinance Bank                                Chief Executive
                              Nawaz       Inshan Ali               
 Ltd.                                                   Officer

 First Women Bank                                       Head of
                              Awan        Suhail                   
 Limited                                                Microfinance

 Khushhali Bank               Nishtar     Ghalib        President  

                                                        Area Sales
 Khushhali Bank               Hassan      Amina                    

 National Bank of Pakistan    Rabbani     Kamran                   
                                                        Retail Banking

 Network Microfinance
                              Tariq       Sohail        Branch Manager
 Bank Limited

                                                        Head of    ,
 Orix Leasing Pakistan Ltd.   Qasim       Aseya

                                                        General Manager,
 Orix Leasing Pakistan Ltd.   Din         Ghias         E-Business 

                                                        Accounts manager
 Orix Leasing Pakistan Ltd.   Subhan      Nasir                    

 Pak-Oman Microfinance                                  Head of Risk
                              Bilgrami    Sajjad                   
 Bank                                                   Management

                                                        Chief of Party,
 Shorebank                    Chen        Gregory                  
                                                        WHAM Pakistan

 Shorebank                    Burki       Hussan Bano                        Not available

                                                        Chief financial
 SME Bank LTD                 Ghazali     Marghoob                 

 Tameer Microfinance                                    Group Executive
                              Mustafa     Shahid                   
 Bank Ltd                                               Director

 Tameer Microfinance                                    Group Executive
                              Sikander    Ali Abbass               
 Bank Ltd                                               Director

                                                        Executive Vice
 Zarai Taraqiati Bank
                              Chohan      Nadeem        President -
 Limited (ZTBL)

 Zarai Taraqiati Bank                                   In charge Project
                              Hussain     Matloob                 
 Limited (ZTBL)                                         Implementation Unit

 MFPs (NGOs & non bank financial institutions)

 Development Action for
 Mobilization and             Rashid      Nagma         Chief Executive

 Jinnah Welfare Society       Shoaib      Qazi          Executive Director

                                                        Chief financial
 Kashf Foundation             Kabeer      Khalid                   


      Organization             Last Name     First Name          Title                     Email

Kashf Foundation              Azim          Kamran                  

National Rural Support                                    Chief Executive
                              Bajwa         Rashid                  
Programme                                                 Officer

National Rural Support
                              Javad         Ahga Ali      General Manager

Orangi Pilot Project          Rashid        Anwar         Director  

Orangi Pilot Project          Baig          Javed         Joint Director

Organization for
                              Halib         Aliya         Program Manager
Participatory Development

Punjab Rural Support                                      Chief Operating
                              Tetly         Khalil                  
Programme                                                 Officer

Punjab Rural Support
                              Mahmood       Nasire        General Manager

Sarhad Rural Support                                      Chief Executive;
                              ul-Malik      Masood
Programme                                                 Officer   

Training and Technical Service Providers (Auditors)

Agha Khan Agency for
                              Jiwani        Salim         Technical Advisor

Anjum Asim Shahid
                              Khan          Shahid        Partner   
Associates (Pvt). Ltd

Center of Excellence in
Microfinance /Institute of    Khan          Dr. Mohsin    Joint Director
Management Sciences

FACET BV                      Loeff         Adriaan       Managing Director

Independent consultant        Spareboom     Pete          Consultant

Institute of Bankers of
                              Ali           Johar         Director  

International Islamic                                     Head of School of
                              Zaman         Khaleeq                 
University                                                Banking and Finance

Lahore University of
                              Abdul Ghani   Dr. Jawaid    Dean      
Management Sciences

Leasing Association of                                    Program
                              Haider        Tahira                  
Pakistan                                                  Coordinator

National Institute of
                              Muqtadir      Qazi          Chief Executive
Banking & Finance

Pakistan Microfinance
                              Ahmed         Mohsin        General Manager

Pakistan Microfinance                                     Capacity Building
                              Shah          Mehr                    
Network                                                   Specialist

Rural Support                                             Chief Executive
                              Khan          Shandana                
Programmes Network                                        Officer

Sindh Microfinance                          Muhammad      Network
Network                                     Ali           Coordinator


       Organization        Last Name    First Name          Title                       Email


 Orangi Charitable Trust   Rashid      Anwar         Director    

 Orangi Charitable Trust   Baig        Javed         Joint Director

 Pakistan Poverty
                           Hayat       Kamal         Chief Executive
 Alleviation Fund

 Pakistan Poverty                                    Chief Operating
                           Jamal       Ahmad                     
 Alleviation Fund                                    Officer

                                                     General Manager,
 Pakistan Poverty
                           Baluch      Tariq Khan    Credit & Enterprise
 Alleviation Fund

                                                     General Manager,
 Pakistan Poverty                                    Human &
                           Akbar       Kamran                    
 Alleviation Fund                                    Institutional

 Pakistan Poverty
                           Iqbal       Khalid        General Manager
 Alleviation Fund

 Pakistan Poverty
                           Nadeem      Mohammad      Manager CPI 
 Alleviation Fund

 Pakistan Poverty
                           Sabir       Farid         Manager Credit
 Alleviation Fund

 Pakistan Poverty
                           Afridi      Kanwal        Manager PMG 
 Alleviation Fund

 Pakistan Poverty
                           Siddique    Saqib         SME- CED    
 Alleviation Fund

 Pakistan Poverty                                    General Manager
                           Arif        Umbreen                   
 Alleviation Fund                                    Education & Health


 Access Group              Ali         Abbas         Head of Technology

 Akhuwat                   Saqib                     Executive Director

 Akhuwat                   Ranjha      Saleem        Director    

 Vellani & Vellani         Vellani     Badruddin     Partner

 Vellani & Vellani         Bhadha      Ferzeen       Not available

                   The Consultative Group to Assist the Poor
          1818 H Street, NW, MSN P3-300, Washington, DC 20433 USA
                   Tel: 202 475 9594    Fax: 202 522 3744

                                    Paris Office
                                 66, Avenue d’Iena
                                    75116 Paris
               Tel: 33 (0) 1 40 69 32 73 Fax: 33 (0) 1 40 69 32 76

                    For more information on CLEARs contact:
Eric Duflos ( or Alexia Latortue (

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