Islamabad, 29th January
2004
Sharing Microfinance Resources and Knowledge in South
Asia
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Cooperation
between microfinance and regulated commercial finance
As a case study for
cooperation between microfinance and regulated commercial finance, the Bank of
Khyber (BoK) had presented their story in this area with a focus on the progress
in implementing institutional reforms since 1995.
The initial focus
of the Bank of Khyber was on socio-economic development with an aim to create
economic opportunities for people at the ‘grassroots’ level. In 1995, BoK
initiated the downscale of its methodology, hired staff with development
background, and started to provide services more adapted to the needs of SMEs
and entrepreneurs. Despite this objective, BoK kept a relatively high average
loan size and faced difficulties to reach the microenterprise market on a large
scale. In 1997, BoK shifted towards a group lending methodology, which reduced
the size of its loans. In 1999, a microfinance unit was created, seen as a
profit centre that broke even in 2000 but was back in the red in subsequent
years. By 2003 BoK had acknowledged the difficulties for commercial banks to
reach the ‘grassroots’ level, which meant that there needed to be a further
deepening of financial services into the rural areas of Pakistan, through
innovative products or partnerships with microfinance institutions. BoK
developed its partnership with NGOs and RSPs, through wholesale lending, as
funding sources (deposits) is abundant through the bank operations. BoK lending
also focused on targeting specific clusters such as eco-friendly tourism at
Swat, off-season regional growers, Women Saving and Credit Association, fish
vendors, Chappal Maker and Khaddar Weaver Association and tea development at
Shinkiari.
The First Women
Bank Ltd (FWBL) is a nationalized bank with a mandate to improve the
socio-economic status of women in urban and rural areas. Despite the number of
microfinance programs in Pakistan, a small proportion of low-income women is
reached by microfinance. FWBL has reached almost 20,000 women through credit
services, while also providing business development services (computer literacy,
legal counseling, tax, marketing) through business centers in Lahore, Karachi
and Islamabad. FWBL has also build some strong partnerships with NGO such as
Kashf Foundation, and has received donors funding to support business centers,
training and capacity building as well as financial services. With the ILO, FWBL
has offered financial services to women of carpet weaving families, with the
objective of eliminating child labor. Almost 1,000 women have benefited from
these services, and the ILO Director has described the project as a model.
In Muhammad
Maduddin’s presentation, made on behalf of the State Bank of Pakistan, he
identified four aspects of innovation. The aspects of innovation saw changes in
banking technology, type of financial services being offered, strategic
behaviours and incentive packages. He saw these changes coming out of five
areas: technology, product, strategy, institutional arrangements and donor
incentives. For the sake of the topic, Maduddin focussed on the institutional
arrangements innovations. In this sub-section he looked at the favourable policy
environment and the regional and supervisory framework for microfinance
institutions in Pakistan.
Like the Bank of
Khyber, the Kashf Foundation used their operations as a case study. Two
points stressed during the presentation was the need to keep the focus on people
needs in providing microfinance services, and the need to continue innovations
in microfinance, as Kashf Foundation was like ‘born again’ each time it expanded
into a new area, needing to train staff and clients. Kashf Foundation also
worked on the further customization of their products and services to their
target market and the standardisation and efficiency of their systems and
processes.
One particular area
of interest that Kashf Foundation was specialising was their credit risk
management structure. This structure looked at three areas in risk management –
economic risk, health risk and death risk. Each area had a specialised area of
mitigation. For example in the area of economic risk they looked to mitigate
micro credit and savings, in the area of death risk they implemented life
insurance policies in order to moderate life cycle risks, and in the area of
health risk the focus was to train clients on reproduction and health
issues.
Kashf Foundation
saw the management of innovation coming through highly customer focussed
decision-making processes, performance reward systems, a competence development
system in training, overall work and client performance, and a keen focus on
knowledge management.
In the Performance
Indicator Report (PIR) of the Pakistan Microfinance Network (PMN), PMN used it
as an opportunity to make progress on the overall performance of microfinance
institutions and banks, and also to see that there was a move towards the
commercialisation of current practices. The objectives that they saw for having
bi-annual PIR was to increase transparency, build a culture of both healthy
competition and self-regulation, track progress, standardise practices, and set
benchmarks. The first PIR for PMN was done in 1999, since then the impact of
holding the reports has given MFI’s an increase in credibility within the
private and public sector. The other benefit that has come out of holding PIRs
is that MFIs have been able to use it as a tool for decision making at their
executive level, which also drive changes in their operations.
Agha A. Javad,
General Manager of National Rural Support Programme (NRSP) highlighted the
success of the urban arm of the NRSP, called the Urban Urban Poverty Alleviation
Project (UPAP), which has reached financial sustainability, even with a lower
efficiency than the reported institutions in the MCRIL Top 10 in South Asia.
UPAP has established innovative practices, for example by keeping a low profile
in running low-budget settlement offices close to their clients, and by
encouraging transparency within the organisation by talking and reporting openly
frauds and management problems.
4. Forms of regulating
cooperation in microfinance
Ayesha Khan, of the
Swiss Agency for Development Cooperation (SDC), saw that one of the biggest
problems in developing countries was that they lacked the microeconomic
infrastructure to be able to implement economic reforms. This meant that the
disparity was stunting the potential for progress in developing countries. Other
problems that she saw were, “the existing regulations and processes, their
effectiveness and transparency, and the corruption associated with them” (Khan
2004, p.9). Her personal view was that the success criteria for measuring the
performance of microfinance institutions in Pakistan, was to look at it in terms
of a client-based success measurable.
What she saw
lacking in current cooperation regulations was the continual and transparent
sharing of experiences amongst members and the appropriate support to
institutional mechanisms for knowledge management in MFI’s. She also saw that
coordinated mechanisms had failed so far because of the continual production of
short-term hybrid projects instead of something with a longer-term benefit. She
also saw that they had failed because they didn’t currently represent a wide
range of interests and didn’t commit to allow assets to thrive.
Khan had identified
that the greatest benefits of countries being in a regional cooperation
agreement came when the socio-economic realities of member countries are
similar. However the problems that would come from this were finding appropriate
resource allocation and benefits sharing. In order for this to happen Khan
believed that international organisations needed to develop available the
technological expertise, strategic funding, have agreements finalised by an
external mediator, and also make services of international organisation
available in order to provide a level of neutrality in the decision making
process for regional cooperation.
Zulfiqar Ahmad took
on a very similar approach to Khan when he looked at the forms of regional
cooperation in microfinance. As the Chief Financial Officer for the National
Commission for Human Development he saw that the key ways to strengthen regional
cooperation was to build government-to-government cooperation, build MFI-to-MFI
cooperation, gain exposure to different programs both in and outside of the
region, build the capacity of membership, form financial consortiums, build
public-private partnerships, and develop strong and effective regional
networks.