Regulatory pistol aimed at microfinance banks

Commercial banks in Pakistan are not unfamiliar with SBPs austere capital requirements. Now the central bank has struck its cane on local microfinance banks, raising the minimum capital requirements for all district, regional, provincial and national players.
Because of the relatively lower capital requirements in establishing a microfinance bank (MFB) than a commercial bank, many potential entrants had been reportedly eyeing the microfinance sector. This move by the SBP helps ensure a level of financial adequacy of such potential players, ensuring sufficient strength of the microfinance sector.
Even the risk profile of microfinance banks continues to be a major concern. According to a report by the Economist Intelligence Unit (EIU), Pakistan continues to face rising numbers of portfolios-at-risk (PAR), which are loans overdue by more than 30 days.
According to last available data compiled by the Consultative Group to Assist the Poor (CGAP) - a consortium of development agencies working towards increasing accessibility of financial services for the poor in developing countries - the PAR of Pakistans microfinance banks rose to 13 percent by June 2009.
The United Nations Capital Development Fund deems PAR above 10 percent for microfinance institutions (MFIs) to be very risky. Consequently, the new SBP regulations will be instrumental in trimming down risks of default in MFBs.
The restructuring of capital requirements have also taken place globally. Two months ago, new Basel-III rules were revealed whereby capital requirements were rendered more stringent, to tighten the belts of banks as far as risk is concerned.
The SBPs regulations have also phased out the capital requirements for MFBs like the Basel III rules, although over a shorter time span. National-level MFBs have to meet the capital requirement of Rs600 million by 2011, Rs800 million by 2012, and Rs1 billion by 2013. Similarly, district-level MFBs have to meet a target of Rs300 million by 2013.
Do the new rules spell any prospective mergers in the microfinance sector of the country? "Probably not," said a representative of one of the leading microfinance banks in the country. "The existing, bigger banks do meet the capital requirements as of now so a merger may not be required at the national level. The smaller, provincial or district level banks might need to merge, but even those will be few," he told BR Research on the condition of anonymity.
Perhaps it is this regulatory stronghold of the SBP which has helped Pakistan bag the 5th place out of 34 countries in the Microfinance Business Environment Rankings, published by the EIU in its report Global Microscope on the Microfinance Business Environment 2010. The country beat its South Asian partners India, Bangladesh and Sri Lanka in the said rankings.
In fact Pakistan ranked 1st in the category of
egulatory framework, sharing the position with Cambodia and Philippines. As far as the category of investment climate was concerned, however, Pakistan fell down to the 20th rank.
Overall, the SBPs supervisory is considered quite sound. With the help of such a strong regulatory back-up, microfinance banks have a lot of scope to boom in the Pakistani market. Industry sources reveal that only 6 percent of the total scope of the microfinance sector has been tapped and the potential for growth is tremendous.
New products such as micro-insurance, with around 3.3 million policy holders, have been a welcome progression of this sector, and new products such as Islamic banking for MFBs are also in the offing. However, caveats in the form of heavy risk bearing will have to be dealt with wisely to help MFBs advance further in the country.

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Paid-up capital leading MFBs

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(Rs billion) as at Dec 2009

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Khushhali Bank                     1.71

Tameer Microfinance Bank           1.35

Kashf Microfinance Bank            0.75

Pak Oman Microfinance Bank         0.50

First Microfinance Bank           0.66*

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*as at Dec 31 2007 (latest available)
Source: Annual Reports, PBA

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Microfinance business environment

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Country           Rank     Score/100

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Philippines         2           71.8

Pakistan            5           64.8

India               8           59.1

Cambodia           16           51.0

Bangladesh         33           39.5

Sri Lanka          42           34.2

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Source: EIU