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Technical Assistance Consultants’ Final Report

Project Number: TA 4894 November 2009

Islamic Republic of Pakistan: Improving Access to Financial Services – Main Report (Financed by the Asian Development Bank)

Prepared by FINCON Services Inc.

For Ministry of Finance & State Bank of Pakistan

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and

ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Improving Access to Financial Services in Pakistan

Final Report

Main Report

(VOLUME I)

November 2009

MINISTRY OF FINANCE GOVERNMENT OF PAKISTAN

TA No. 4894-ADB

Submitted by:

Fincon Services Inc.

Canada

ADB TA 4894-PAK: Improving Access to Financial Services

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Table of Contents

1. INTRODUCTION: OVERVIEW AND BACKGROUND ....................................5

2 INCLUSIVE FINANCIAL SECTOR STRATEGY..............................................18

3 TECHNOLOGY OPTIONS...............................................................................22

4 ALTERNATIVE FINANCING / CARBON CREDITS........................................30

5 CREDIT INFORMATION BUREAU .................................................................36

6 GENDER..........................................................................................................39

7 ISLAMIC MICROFINANCE..............................................................................41

8 LEGAL AND REGULATORY FRAMEWORK .................................................47


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Introduction – Overview & Background


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1. INTRODUCTION: OVERVIEW AND BACKGROUND 1.1 The Islamic Republic of Pakistan, a country of 170 million people, is

predominantly agrarian. Out of the total 79 million hectares of land, 22 million are cultivated. Ninety-seven million people live in rural areas comprising 7 million households. A total of 22% of the country’s population lives below the poverty line, comprising 41million people.

1.2 Microfinance services currently reach slightly above one million people as

against a potential client base of 25-30 million. The share of micro credit lending in the overall supply of rural credit in Pakistan remains around 20%. The total estimated demand for rural credit is PRs.350 billion as against a credit supply of PRs169 billion in 2007. Untapped savings (money in the informal sector) are estimated at PRs.300 billion.

1.3 Cognizant of the constraints associated with the delivery of micro loans, the

Government of Pakistan made microfinance a key theme under its Medium-Term Development Framework (MTDF), 2005-2010, as well as in the broader financial strategic directions to achieve Vision 2030. Building a more inclusive financial sector means deepening the quality of the services to the poor and expanding the type of coverage offered. To extend outreach, the vision is to create a blend of economic efficiency and sustainability with an underlying objective to pass on the benefits to the economically deprived strata of society.

1.4 In order to implement an inclusive financial strategy that encompasses all

financial services providers (public and private, formal and informal) and that forms an efficient synergistic network, the GoP signed a loan agreement with the Asian Development Bank amounting to US$320 million to support a reform program called “Improving Access to Financial Services Program” Phase -1 (IAFSP).

1.5 The program is designed on the basis of a ten-pronged intervention strategy:

I. A national Inclusive financial strategy to integrate all financial services providers at one objective podium, to deliver a range of financial services otherwise being delivered either in isolation or under an unplanned growth;

II. A Public Private Partnership (PPO), to form partnerships and relationships among formal/informal and public/private entities that are engaged in financial services delivery.


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III. Reducing transaction costs by adopting innovative branchless micro financial operations that will deepen and expand outreach to the rural areas with minimum time and cost.

IV. A Credit Information System to increase financial transparency, check data reliability and operationally integrate features in the broader financial system; to create an MF-specific credit information bureau for all micro financial service providers.

V. An Islamic microfinance component where the purpose is to create products and processes in Islamic micro lending that will tap the vast majority of productive/transitory poor, who are otherwise reluctant to avail interest- bearing credits because they are seen as un-Islamic.

VI. Carbon financing to benefit from international carbon credits and to adopt environmentally friendly micro financial loan products in rural areas that will save costs and energy with indigenous resource features.

VII. Legal and regulatory reforms, currently supported by SBP.

VIII. A land record and revenue management system that will document land titles with appropriate GIS layering to enable productive land use through efficient land records as well as revenue and management system.

IX. Gender policies directed toward supporting the growth of a micro-entrepreneurial/financial services structure for rural women

X. A financial services capacity building program to develop a broad human resource base that will serve all of the components above.

1.6 The program was supported by a Technical Assistance (TA) Grant of US$2.5

($0.5 million being the counterpart funds of MoF) to provide advisory services on the technical components of the program. The TA Team shall support advisory services that will bring coherence to the national Inclusive financial strategy.

1.7 Consequent to the contract negotiations of 20.8.07 at ADB Manila, FINCON

Services Inc., Canada was selected as the TA Team. In compliance with the decisions of the negotiations, the TA Team was partially fielded on 20th of August 2007 at Islamabad and Karachi comprising a Team leader and two international consultants, followed by the successive fielding of International and National consultants.

1.8 The Ministry of Finance (the Executing Agent) promptly provided workstation for

the TA Team. Thus the Inception Report was assembled under flexible home inputs of most International consultants, whose onsite availability was subsequently ensured in full. The inputs of domestic consultants were received at optimum level. On the concurrence of ADB to extend the deadline of the submission of the Inception Report until mid-November, the TA Team had the opportunity to include comments of the Team being on ground since 29 October,


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2007. The TA-4894 comprised eight discrete components with multifaceted interventions vis-à-vis a vide range of implementing agencies. It was thus deemed appropriate to prepare and develop exclusive reports on each component in order to arrive at convenient processing and feedback of the various implementing agencies. As such, in order to give an integrated effect, the reports comprise of eight mutually exclusive volumes for focused evaluation. The final version of the inception report was submitted to the Ministry of Finance on 19th March, 2008. The comments incorporated in the inception report were made possible after having stretched the original scope of work to the requirement of SBP.

The first interim report was submitted to the Ministry of Finance on 28th April 2008 as an exclusive document as per requirements of IAs for evaluation and further guidance to elaborate upon and develop the second interim report. To develop second interim report, a team of international and national experts was fielded by FINCON Services Inc. Canada from 29th July 2008 to 28th August 2008 simultaneously at State Bank of Pakistan (SBP) Karachi and Ministry of Finance Islamabad, Pakistan to develop an exclusive second Interim report pertaining to the period under review; addressing the comments received on the first interim report and additional deliverables called for by the SBP and other Implementing Agencies.

A sub-team of three international experts supported by their national counterparts was fielded at State Bank of Pakistan, Central Directorate Karachi, to provide dedicated consultative inputs to the second Interim report. The current draft final report submitted to the Ministry of Finance is the final version of all inputs consolidated and refined over a period of nineteen months, in accordance with the requirements of the EA/IAs most precisely relating to the needed guidance by SBP. Pertinent to add that the current report is a value added reflection of the growth path of IAFSP (Phase-1) developed and implemented by the respective implementing agencies including that of EA. The TA intervention also includes a number of nationwide dissemination and feedback consultative workshop on the various components of the ADB Technical Assistance. A team of International / National Consultants was fielded at Islamabad Ministry of Finance and Karachi SBP simultaneously from 23rd November 2008 to 21st January 2009 to formulate the Draft Final Report. Here it may be noted that TA life has been extended by ADB till 20 the June 2009 to include Islamic MF survey providing national wide Islamic MF sector demand ,supply and response analysis’s for EOIs have already been advertised. Moreover the draft final report shall also include already concluded final reports on CIB and Gender MF. The gist of accumulated component-wise inputs is summarized below:


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INCLUSIVE FINANCIAL SECTOR STRATEGY COMPONENT 1st Interim Report Inputs

In addition to preparation of Implementation Plan as featured in the SBP strategy “Expanding Microfinance Outreach (EMO)”, the Consultant provided inputs on detail implementation arrangements of SCUs

Detailed workable frame work for CIF

Detailed workable frame work on smart subsidies

2nd Interim Report Inputs

An implementation plan has been developed indicating the activities to achieve the benchmarks of officially adopted EMO strategy. The format for the plan is in accordance with the management information requirements of SBP and it covers the proposed actions as suggested in the ADB/RRP and CGAP CLEAR & PD.

The reports also contain flag notes and general direction on the subject of Community Investment Fund (CIF) for which the detailed guiding parameters are also discussed under the legal & regulatory component.

The use of smart/targeted subsidies in conjunction with CIF vis-à-vis interventions of the implementation plan are also defined in detail under legal & regulatory component.

Draft Final Report Inputs

Updation of Implementation plan as advised by SBP.

Updation of monitoring formats to monitor the growth of Implementation Plan.

(Public) disclosure of social performance / transparent lending and Consumer Protection.

Suggest basic principles.

Set minimum standards.

Provide worldwide examples (developed and developing countries.

Recommend role / position of SBP.

Prepare position paper and guidelines for SBP.

Discuss and analyze position / role other stakeholders in the MF sector.

Suggest reporting guidelines on social performance / and (outlines for) codes of conduct in the area of consumer protection and privacy.


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ISLAMIC MICROFINANCE & INTERNATIONAL ISLAMIC FINANCE ACADEMY COMPONENT 1st Interim Report Inputs

Evaluate potential for Islamic microfinance by identifying sector characteristics, experiences, issues and opportunities

Provide input for the national survey instrument (NSI) to help:

o Identify/develop Shariah compliant products and services matching demand, acceptability, and business needs of micro entrepreneurs

o Assess awareness and attitudes of service providers and communities

Review of Islamic financial instruments practiced by Islamic banks and their applicability in microfinance.

To design and offer contemporary educational, certifications and professional training programs in Islamic finance all with strong domestic relevance, and at world class standard.

To establish formal alliances with reputed business schools, bringing the best of global management practices and thinking into the curriculum.

To bring on board a faculty of eminent intellectuals with research and teaching experience, including those with credible Islamic finance background. These would be sought from reputed business schools, training service providers, religious schools and the industry.

To provide a vibrant research environment through broad based infrastructure and industry alliances.

To undertake collaborative research studies with reputable finance think tanks and research institutions.

To organize seminars, workshops and conferences to create awareness of Islamic finance as well as for disseminating research findings.

To promote focused industry forums to discuss specific market challenges and lobby for solutions.

To create and maintain a dynamic knowledge database of information on best practices, industry issues, Shariah’ rulings, financial market developments and stakeholders, amongst others.


The report contains an updated quadrant of Islamic Finance Academy feasibility report based on the findings and feedback of Islamic Finance


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workshop (held at NIBAF Islamabad) and the comments raised by Islamic Banking Department, State Bank of Pakistan.

It includes detailed review of the latest developments in the Islamic microfinance industry, local and international markets as well as additional information received from various training providers examined in the first Interim Report.

A detailed analysis of existing and future Islamic microfinance products, their operational and financial methodology vis-à-vis international and Pakistan microfinance sector, is provided in detail.

The report incorporates the findings of the consultative workshop on Islamic microfinance wherein the findings of first interim report and draft survey instrument were presented. In addition, the report also highlights the opinion of the managements of Islamic banks, MFBs, and MF-NGOs about possible operating strategy, products and methodologies in the realm of Islamic microfinance.

The scope of NSI has also been extended to Mudarabahs to evaluate their potential to offer Islamic microfinance investments; in view of acute shortage of resources with MFBs and MF-NGOs, having existence in rural and remote areas.

A few alternatives were considered including coordinating Shariah advisory and Islamic microfinance technology from Islamic banks and establishing a subsidiary of SBP to provide technical and financial support to the sector.


To design and offer contemporary world-class educational, certifications and professional training programs in Islamic finance all with strong domestic relevance primarily targeted to the local market with worldwide accessibility

To design and deliver comprehensive, broad based, market driven program offering targeting a range of audience in various fields and professions

To offer quality training and research services irrespective of gender, race and ethnicity

To establish formal alliances with reputed business schools, to add value and bring the best of global management practices and thinking into the curriculum

To bring on board a faculty of eminent intellectuals with research and teaching experience, including those with credible Islamic finance


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background. These would be sought from reputed business schools, training service providers, religious schools and the industry

To provide a vibrant research and training environment through broad based infrastructure and industry alliances

To undertake collaborative research studies with reputable finance think tanks and research institutions

To organise seminars, workshops and conferences to create awareness of Islamic finance as well as for disseminating research findings

To promote focused industry forums to discuss specific market challenges and lobby for solutions

To create and maintain a dynamic knowledge database of information on best practices, industry issues, Shariah’ rulings, financial market developments and stakeholders, amongst others

To undertake a bottom up approach for curriculum development, initiating with foundation level programs and progressing towards graduate, advance and specialized offering in the course of time

To build linkages with various financial institutions, end users and regulatory authorities to provide practical relevance to the programs and generate better employment opportunities for the candidates

To uphold the religious context of Islamic finance with equal emphasis on quality, acceptability and affordability

Highlighting the opinion of the managements of Islamic banks, MFBs and MF-NGOs about possible operating strategy, products and methodologies in the realm of Islamic Microfinance.

Detailed review of the latest developments in the Islamic microfinance industry, local and international markets.

A detailed analysis of existing and future Islamic microfinance products, their operational and financial methodology vis-à-vis international and Pakistan microfinance sector.

Scope of NSI extended to Mudarabahas to evaluate their potential to offer Islamic microfinance investments.

A few alternatives including coordinating Shariah advisory and Islamic microfinance technology to establishing a subsidiary of SBP to provide technical and financial support to the sector.


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TECHNOLOGY OPTIONS COMPONENT 1st Interim Report Inputs

Confirm BB technical feasibility and options

o Review industry feedback for Guideline recommendations

o Confirm potential BB applications for feasibility analysis and piloting

o Follow-up interviews & workshop with stakeholders

o Confirm partners for collaboration and piloting

Establish Framework for Mobile Fund Remittance Pilot

o Identify 1-2 specific BB styles / applications for trials

o Set clear goals and objectives for piloting activities

o Integrate pilot criteria and design for progress evaluation

o Scope geographic and socio-economic coverage

o Identify agent types for training as BB agents and pilot deployment

Support implementation of BB pilot

o Ensure pilot activities can be built upon in the future


Evaluation of Branchless Banking Regulation of SBP March 2008, keeping in view current market response/analysis to include; potential development path and future horizon, compared with international experiences.

Growth path and operational impediments of local and international bank-led branchless banking activities; a comparative and analytical review.

Current industry opinion to include; mobile operator, commercial banks, branchless banking technology providers, recommending possible revision and direction in the context of commercial inevitability versus piloting and development assistance.

Use of smart subsidy targeting to develop commercial viability, triggering branchless banking growth.


The existing BB Regulation – Recommendation on a minor adjustment to the final BB Regulation as issued, dealing with the KYC measures enacted for sign-up of new customers. The object is to enable greater


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flexibility for BB service providers in the precise methodology chosen to meet the AML/CFT requirements of the SBP.

Future BB Regulation – Guidance on implementation of future BB regulation, as the next step to facilitating greater freedom in the participation of non-bank entities in BB. This would include the allowance of some form of e-money account for very low level banking (i.e., stored value accounts that are less than full bank accounts) which is often part of successful BB services internationally.

Telecommunications Regulation - Recommendation on a revision to the Telecommunications Regulation on Branchless Banking that was issued by the Ministry of Information Technology (MoIT), through the Telecommunications Regulatory Authority), in order to remove or lighten a case of “double regulation” on telecom operators related to interconnection and inter-operability of BB systems.

Pilot Project - A detailed conceptual design for the piloting the rural outreach of one or more commercial Branchless Banking initiatives through a “smart subsidy” competition that would demonstrative the feasibility of Branchless Banking being implemented and having a “transformative” impact beyond the natural boundaries of the already banked urban population.

BB User Application - Description of a fund remittance component for the pilot project that would enable an application with very high demand and utility for rural users.

Technical Assistance on Pilot implementation – Development of the terms of reference, specifications and implementation of the pilot project.

Technical assistance to provide capacity building – Focusing on key target operating entities/partnerships (e.g., micro-finance banks and telecom operators) which are ready for BB short-term implementation. These measures would be in the areas of management and staff development; BB agent training; focused market study; preparation of promotion and marketing materials and user guides.

BB Service level Agreements - Guidelines and template for service level agreements between bank, telecom operator and/or agents or users and

Technical standards on system and inter-operability and security – an outline of the three most relevant and recommended standards to be followed and specified in Pakistan, namely: Payment Card Industry Data Security Standard (PCIDSS); Standard for Financial Transaction Card originated Messages (ISO8583); and Message Authentication Codes (MAC).


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LEGAL & REGULATORY COMPONENT 1st Interim Report Inputs

Pakistan Post - The Post provides 2 main savings products, one by the Government Savings Bank and another distributed on behalf of the Directorate for National Savings. The regulatory and supervisory implications are not clear. They must be clarified and explained to all stakeholders;

Different strategies for further promoting and developing transfer services by the Post, particularly in rural areas, need to be studied;

The Post’s provision of insurance and loan products seems to be in contradiction of existing laws. This should be studied and clarified;

The data that Post holds on individuals constitute the basis for further development of financial services, but this situation requires careful management

SBP should hold meetings with main stakeholders for the development of Postal financial services: Finance Ministry, Communications Ministry and the Post.

Credit Unions - Credit Unions are considered potentially ideal financial services providers for rural and low-income citizens and for small businesses, but they must be fully integrated into the formal financial sector, and this requires their being financially self-sustainable.

The central bank should establish & manage a CU program around the following points:-

o Credit Unions can only become financially self-sustainable when they fully comply with the core principles of Cooperative Societies

o The Central Bank does not have the need or the required resources to effectively supervise all credit unions as most CUs only intermediate member savings and are small and do not present a systemic risks;

o Compliance with cooperative principles can only be regulated and supervised by a cooperative expert. There still seems to be a Cooperatives Registrar in Pakistan;

o The Central Bank needs to be informed about the financial services performance of CUs, but only needs to regulate and supervise them directly, when they operate over a certain level (number of clients, amount of savings involved).



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Credit Unions: Detailed review and comments on the concept paper developed by SBP on Credit Unions, providing specific advice on setting up a Savings & Credit Union program in Pakistan, keeping in view international best practices and Pakistani experience. Suggesting specific steps that SBP and others take in setting up of a viable alternate saving & credit union channel for delivery of financial services at grass root level.

Post - MFB partnerships: Prepared a strategic review on the Pakistan Post and Microfinance Bank partnership agreement. Reviewing the pros and cons of the agreement, regulatory oversight required and suggesting ways for a viable use of Post Office network for delivery of financial services in remote and rural areas by Microfinance Banks.

CIF - Smart subsidies: Provide a specific evaluation and recommendations for creating a Community Investment Fund that uses Smart Subsidies for accelerating financial inclusion in the country keeping in view the international best practices within the context of the Pakistan financial services structure.

SBP regulations: Proposed out line review of the MF law and the prudential regime for MFBs in Pakistan and suggesting areas for improvement and enhancement of financial inclusion in the country keeping in view the given prudential norms to explore possibilities


Credit Unions: Development of an SCU (proposed name Savings & Credit Unions) action plan with Implementation Plan.

Review of the legal and regulatory framework (including policies and guidelines) for Microfinance Banks.

The legal expert would discuss the Post – MFB partnership with Post and First MFB, to agree on the second interim report findings and to share views on future collaboration.

Following last minute information from SBP and from information gathered from the media, the expert suggests to SBP to change the title of his proposal on a possible Community Investment Fund (CIF) to a support program for increasing financial services outreach.

Review of Policies and Laws.


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CARBON FINANCE COMPONENT 1st Interim Report Inputs

To develop projects in the identified areas

To develop strong knowledge & technical resource base to implement CDM projects

To raise public awareness and build capacity

To develop a strong institutional & financial infrastructure in order to optimize the opportunities and facilitate future growth in the industry

Develop policies to encourage community / household CDM projects

Enhance the portfolio of potential products

Introduce a well-targeted subsidy scheme

Establish a carbon Fund / Bank


A new international case study relating to installation of solar panels has been introduced. This was introduced mainly to demonstrate the CDM eligibility of solar panels project. This study also has relevance to the proposed rural electrification program under which AEDB plans to provide solar panels to 400 villages.

CER calculation with regard to biogas, solar panels, windmill plants have been revised based on the information obtained during field visits. Further some of the calculations have been revised with some updated information and research studies especially sourced from UNFCC.

The strategic framework is proposed for the key stakeholders to develop and implement household and community CDM projects. A capacity building framework has also been introduced where the training needs of the key institutions have been identified along with the methodology.

A detail framework for establishing a carbon fund with cost and financing structure.


To provide advisory support regarding international frameworks and country case studies for channeling carbon credits (grant) financing to the household level.

To conduct feasibility study for carbon credits (grant) financing for households and the poor in Pakistan.


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To include a needs assessment for training and capacity building of households and external maintenance services.

It may not be out of place to add once more, that the project team went way beyond the scope of work to accommodate the requirements of the various implementing agencies. The comments of the EA/IAs are solicited enabling FINCON Inc. Canada to conclude the final report. The TA-4894 Team records it special gratitude and thanks to the focal persons of EA and IAs for their dedicated cooperation and continued support through the course of this TA and in formulation of this Draft final report.

The details of inputs for each of the components are given in separate chapters.


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2 INCLUSIVE FINANCIAL SECTOR STRATEGY 2.1 The TOR of the strategy component of the IAFSP was re-directed towards

formulating a detailed implementation Plan, since a Government approved strategy was already in place as per 14 February 2007 (the Expanding Microfinance Outreach or EMO Strategy).

2.2 In order to prepare a comprehensive Implementation Plan, all strategy and policy support interventions that took place by the end of 2006 and early 2007 were reviewed (RRP of the IAFSP programme, the CGAP CLEAR&PD, and the EMO strategy itself.

2.3 All available strategy analysis and recommended interventions were compared, overlaps removed and ultimately re-grouped, in macro, meso and micro level activities and interventions. This resulted in the so-called “comprehensive long-list of activities”.

2.4 The time horizon for the Implementation Plan was adjusted to over the period 2007 to 2010, in order to fall in line with GOP planning cycles. All activities of the comprehensive long-list were plotted into a Gantt chart in close cooperation with the SBP staff, leading to the Inclusive Financial Sector Implementation Plan. The Plan provides activity descriptions, time bound benchmarks and results and indicates responsible parties per activity. This Plan should be updated per quarter.

2.5 For monitoring and evaluation purposes, an activity based reporting format was designed, the so-called “activity status report”. SBP, being initiator and “owner” of the strategy and the Implementation Plan can use such reporting format for internal use, but also for reporting to outside stakeholders such as the Microfinance Consultative Group. For different users of the IFSS Implementation Plan (such as SBP internal, ADB, Ministry of Finance/Planning commission, MFCG, general public), different sub-sets of activities can be selected from the Plan. For all proposed activities, an indication of the funding sources was provided. It was concluded that through the FIP programme and the IAFSP fund, sufficient sources are available to fund the Plan. The IFSS Plan was updated as per the status of January 2009.

Consumer protection and disclosure of social performance

2.6 In connection with 2 macro level activities, the Financial Sector specialist looked at Consumer protection and disclosure of social performance. Social performance can be “internally driven” (The institution itself acts socially as it is


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established to do so), or “externally expected” (government, general public, see the institution as an instrument for improving the society or alleviating poverty). The internally driven version is more sustainable, and externally “enforced’’ disclosure must be limited to a minimum.

2.7 Consumer protection is an aspect of “responsible” financial services delivery. International initiatives by CGAP, SEEP network and GRI do exist in the area of Consumer protection and reporting on social performance. Consumer protection is especially important for microfinance services, due to the character of the client base.

2.8 SBP has issued prudential regulations and guidelines, a banking ombudsman has been established, and the association of microfinance providers (PMN) has issued a code of conduct on consumer protection. Main areas covered are avoiding over-indebtedness, consumer complaint handling (including redress), transparency in terms and conditions, and fair debt collection.

2.9 Credit Information Bureaus can play a role to avoid over-indebtedness. At the same time, consumer privacy issues are at stake. A pilot CIB for the microfinance sector is being established.

2.10 “Demand side” interventions are underway in the form of funding resources for financial literacy programmes, and could be further supported through consumer protection groups strengthening.

2.11 Disclosure or measuring of social performance is happening through collection by SBP of data from the Banks and Microfinance Banks, through quarterly reports on Condition. In addition, members of PMN provide quarterly data to the PMN published reports, which contain elements of social performance. Recommendations are made to capture data that bear more relevance to social performance, such as breadth, length, depth of outreach.

2.12 Instead of capturing mostly quantitative data on financial performance, more data on the quality of microfinance delivery could be captured. Suggestions are made. Also, a proposed “classification’’ of districts is proposed to judge whether poorer and remote segments of the population are reached.

Recommendations for Future Implementation


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2.13 Selected recommendations for the implementation plan consumer protection/social performance are:

SBP/MFD adopts routine updating of the Implementation Plan per quarter. Mostly for internal use, of the total comprehensive Plan activities, and uses selected activity progress for its envisaged Development Finance quarterly report.

While SBP has its EMO strategy as the approved strategy, it is important that the GOP, through the Planning Commission, ensures more embedding of the strategy in broader Policies of the government, such as Poverty Reduction strategies and Medium term Planning Framework.

Dialogue with the microfinance sector has always been a corner stone of proper regulatory framework development in Pakistan. This dialogue is suggested to continue on a structural basis. The IFSS implementation Plan can be a core document for the dialogue with PMN and CGMF.

Consumer complaints handling should preferably be done through proper handling and redress procedures at Institution level. SBP/CP, Mohtasib and PMN external handling systems are to be used only as a secondary step. Efforts in regulation and inspection should be focused on this principle.

Improved tracking and monitoring of complaints at all levels should provide feedback on core areas of weaknesses and indicate resources/capacity needed for redress and handling of complaints (in SBP, and with Mohtasib). PMN could include summary report on consumer complaints in its sector review.

Clarity is needed on the jurisdiction of the Mohtasib for the microfinance banks. SBP/CP is to look into this matter. Even though PMN members (includes all MFBs) are envisaging their own redress system, avenues of redress via the Mohtasib and SBP/CP should be in place.

For a first step in “aggregate” social performance disclosure, SBP MFD should publish its own sector review.

FIP ISF could be used to provide capacity building in the adoption of worldwide accepted reporting standards on social performance such as GRI.

A number of improvements to definitions of terms in reporting on Condition could be introduced. This will improve transparency in reporting and better year to year comparison of results. Urban and Rural should be clearly defined, as well as uniformity in use of Branch or district.


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It is recommended to introduce district classification in terms of being more or less “resource deficit”. Other indicators could be population density, infrastructure, poverty mapping. Such classification allows analysis of outreach to, or “inclusiveness” of the poorer segments of the population. It can also serve as a basis for eligibility for certain supportive measures. Alternatively, regulatory framework could be differentiated on the basis of such classifications.


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3 TECHNOLOGY OPTIONS 3.1 Following issuance of the Draft Guidelines on Branchless Banking in November

2007, the SBP undertook consultations with the banking and telecom and technology industries and, as noted above, subsequently issued a Branchless Banking Regulation on March 31st, 2008. During the period since commencement of the project (October 2007 to February 2009), the technology consultant has conferred three times with the SBP, the Ministry of Information Technology (MoIT), the Pakistan Telecommunications Authority (the regulator) as well as with the leading players in the financial, telecom and technology industries, in order to understand all issues relative to the development of Branchless Banking in Pakistan.

3.2 Objectives for the technology specialist have been to carry out research internationally, and consultations in-country, from which to identify and examine the most feasible models of Branchless Banking (BB) for implementation in Pakistan. Over the course of the project, this task has evolved to be defined within the context of supporting the development and implementation of the Branchless Banking Regulation that was released in draft form in November 2007 and formally issued by the State Bank of Pakistan (SBP) on March 31st, 2008.

3.3 There are approximately 25 million bank accounts held in Pakistan’s government and privately owned commercial banks, though the number of individual account holders is less than half of this figure. Of these, it is estimated that less than one third, who are account holders in five banks offering m-banking services, have access to some form of branchless banking. Furthermore, the transaction level of mobile banking is to date generally low – until recently representing only 0.01% of all transactions which take place in the country. As well, the current outreach of these services into “unbanked” rural and low income areas which could most benefit from BB services is minimal.

3.4 The consultant believes that the SBP’s issuance of BB regulation, while representing a relatively conservative “Bank-led” approach, has contributed to sound and secure market development. Overall, the publishing of clear regulation provides stability. However, there are some aspects where, in the consultant’s opinion, additional stimulus to help accelerate the pace of roll-out of “transformational” BB services would be beneficial. Complementing the consultant’s initial task therefore was an activity focused on identifying and defining various recommendations and measures that would help to accelerate the emergence and development of branchless banking in areas of the country that are “unbanked” and would benefit from its successful roll-out.


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3.5 The consultant developed nine recommendations or specific measures, which are all described in or attached to this Final Report. These comprise the following:

(i) The existing BB Regulation - Recommendation on a minor adjustment to the final BB Regulation as issued, dealing with the KYC measures enacted for sign-up of new customers. The object is to enable greater flexibility for BB service providers in the precise methodology chosen to meet the AML/CFT requirements of the SBP;

(ii) Future BB Regulation - Guidance on implementation of future BB regulation, as the next step to facilitating greater freedom in the participation of non-bank entities in BB. This would include the allowance of some form of e-money account for very low level banking (i.e., stored value accounts that are less than full bank accounts) which are often part of successful BB services internationally;

(iii) Telecommunications Regulation - Recommendation on a revision to the Telecommunications Regulation on Branchless Banking that was issued by the Ministry of Information Technology (MoIT), through the Telecommunications Regulatory Authority), in order to remove or lighten a case of “double regulation” on telecom operators related to interconnection and inter-operability of BB systems;

(iv) Pilot Project - A detailed conceptual design for the piloting the rural outreach of one or more commercial Branchless Banking initiatives through a “smart subsidy” competition that would demonstrative the feasibility of Branchless Banking being implemented and having a “transformative” impact beyond the natural boundaries of the already banked urban population;

(v) BB User Application - Description of a fund remittance component for the pilot project that would enable an application with very high demand and utility for rural users;

(vi) Technical Assistance on Pilot implementation – Development of the terms of reference, specifications and implementation of the pilot project;

(vii) Technical assistance to provide capacity building – Focusing on key target operating entities/partnerships (e.g., micro-finance banks and telecom operators) which are ready for BB short-term implementation. These measures would be in the areas of management and staff development; BB agent training; focused market study; preparation of promotion and marketing materials and user guides;

(viii) BB Service level Agreements - Guidelines and template for service level agreements between bank, telecom operator and/or agents or users (attached as Annex A); and

(ix) Technical standards on system and inter-operability and security – an outline of the three most relevant and recommended standards to be followed and


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specified in Pakistan (attached as Annex B), namely: Payment Card Industry Data Security Standard (PCIDSS); Standard for Financial Transaction Card originated Messages (ISO8583); and Message Authentication Codes (MAC).

3.6 All of these were identified at the time of the 2nd Interim Report and were discussed with members of the Project Steering Group (namely in SBP and MoIT) and with industry stakeholders. The measures received broad support, while some were agreed for implementation in a slightly modified fashion than originally conceived.

3.7 It is worth noting that after a slow start following the issuance of BP’s BB

Regulation in March 2008, the banking and telecom industry were finally making moves to commence implementation of new BB services in Q1 and Q2 2009, and the pace of service roll-out of the earliest new entrant is rapid. The Consultant has made recommendations which have already contributed to progress. It is also recognized that some of the recommendations can afford to be implemented in a “measured” and patient way, as and when judged necessary. On the other hand, some (such as the technical assistance recommendations) are, in the professional judgement of the Consultant, important to further development. Some are already useful since they are in the form of guidance, whereas some (such as the capacity building measures) should be treated as requiring a response and action from the Steering Committee and ADB. While all of the above thus remain as primary recommendations and/or outputs from the consultancy, they are presented in this Final Report together with some comments, as appropriate, as to how they could or should be implemented.

3.8 SITUATION ANALYSIS

3.8.1 Key industry stakeholders, including banks, mobile operators and third party technology providers were contacted three times during the course of the consultancy. These occasions were November 2007, August 2008 and December 2008. Discussions centred progressively on their views regarding the technological and commercial aspects of m-banking (i.e., branchless banking) on the draft and final Branchless Banking regulation, and on their possible intentions in the Branchless Banking field and related matters. All mobile operators contacted expressed strong interest in pursuing a Branchless Banking initiative with a financial partner in accordance with the Regulation which dictates a bank-led approach. While several also expressed concerns with the regulation which, in their opinion, did not fully recognize the market risk (as opposed to the prudential risk) that they would be expected to bear. Clearly, there were some factors holding back the mobile operators from rapid investment in BB, even


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though at least two of the operators have now made moves to invest in some form of BB initiative.

3.8.2 Microfinance banks such as Tameer and First Microfinance Banks are keen to lead or to participate in piloting activities especially in agent capacity development in current Branchless Banking initiatives in the use of Point of Sale (POS) machines and mobile ATMs. In addition, the mobile operator Telenor has taken a controlling interest in Tameer, ostensibly for the purpose of entering into the BB field in accordance with the BB Regulation. In addition to the SBP, the Ministry of Information Technology, as the policy making body for telecommunications, and the Pakistan Telecommunication Authority (PTA), have taken steps to provide a regulatory framework, which is generally positive except for one area prescribing enforced interconnection, which the mobile operators consider to be a double regulatory burden, and to which the consultant, following discussion with MoIT and PTA has recommended a revision.

3.9 THE BRANCHLESS BANKING REGULATION

3.9.1 Following the issuance of the Draft Guidelines on Branchless Banking in November 2007, the SBP undertook a consultation process with the banking and telecommunications industries. The Draft Guidelines had highlighted a number of AML/CFT security risks from which it had determined the degree of regulation required. Having considered the viewpoints, concerns and inputs of many, the SBP’s March 31st Regulation has established a sound and relatively risk-free framework for the start-up of Branchless Banking activities in Pakistan under a range of permissible bank-led models.

3.9.2 The regulation outlines clear rules for risk-based customer due diligence, as well as delineating the roles and responsibilities of key of bank officials within any financial institution taking responsibility for branchless banking. However, the regulation allows for the use of banking agents, which could be a wide range of corporate or individual entities and also managed by telecom operators so long as the AML/CFT requirements are strictly met under the terms of a strong agency agreement. The regulation further outlines the potential role of third party technology suppliers and lays out in detail the requirements for customer protection and awareness, as well as Branchless Banking procedures.

3.9.3 On balance the Consultant supports the need for regulation which places banks in the critical role of responsibility for Branchless Banking transactions. The Consultant also highlights the fact that in the vast majority of international cases, considered to be leading examples of branchless banking, although the energy and market leadership usually comes from telecom operators, a banking partner invariably plays the key role of account hosting and financial management. Of six leading international cases studied in detail, one was initiated entirely by a bank, while all of the remainder were initiatives of telecom operators and all but one have a bank in the critical role of meeting the AML/CFT requirements of their respective central banks. It is argued that at least three of these cases could


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meet the requirements of the BB Regulation, with the relevant agency agreements in place, and thus be labelled as “bank-led” even though the banks were not necessarily prominent in the start-up and marketing of the service. In the light of this, it is important to note that market and brand leadership (most often carried by the telecom operator) should not be confused with process and regulatory conformance. The key lesson is to encourage (and not to hinder) the evolution of BB models to take place with whatever “face” or marketing approach the telecom – banking partnership would like to use, provided the risk-based customer due diligence, relevant KYC requirements and AML/CFT controls are in place and vetted by the banking partner, either directly or through a tight agency agreement. The Consultant points out that the strongly bank-centric, as well as bank-led, approach taken by the BB Regulation will most likely result in relatively slow and measured BB development. During the final consultant mission in December 2008, it was clear that the telecom operators, whose role is critical to the success of BB roll-out into unbanked and rural territory, were still positioning themselves and seeking to negotiate favourable strategic and revenue sharing arrangements with leading commercial and microfinance banks though, as noted, one has taken the bold step of acquiring a controlling interest in an MFB for this purpose.

3.10 POTENTIAL DEVELOPMENT PATH FOR THE BRANCHLESS BANKING REGULATION

3.10.1 Existing regulation - While generally supporting the BB regulation, the Consultant believes that the first and only revision that is pressing on the existing Branchless Banking Regulation is to make an adjustment to the Level 1 entry conditions (KYC requirements), to be better adapted to the realities of small, remote communities and remote transactions. Assuming such applications will be conducted by agents, remote from the physical reach of direct bank employees, the “required conditions” could make better use of existing technological capacity.

3.10.2 This could, in the Consultant’s view, involve some minor revision to the current Level 1 KYC / entry requirements. Specifically, it is not unusual for agents in other Branchless Banking cases internationally to be able to open customer accounts without the customer physically filling out a form or having a “face-to-face contact with a designated employee of the financial institution” as the Regulation states, but for the transaction still to have a good level of control. A strong example of how this is successfully being implemented by a leading example in South Africa is discussed in the report. After discussion with SBP on this matter, the consultant understands that SBP will, on a case by case basis, consider all reasonable operational and technical proposals on this matter from banks and/or bank-operator partnerships, provided they meet the KYC requirements of the bank or banking partner.


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3.10.3 Future regulation - The shape of future regulation (i.e., the next phase) should include consideration of the following, in the Consultant’s view:

(i) Set and clarify legal boundaries between e-money, retail payments and related stored-value accounts and allow non-bank participation under defined terms, to be evolved, with possible revision of relevant draft legislation, discussed in the report, if necessary. While the Consultant has noted that almost all international BB cases involve a bank-telecom operator partnership with the bank playing the key security and accounting role, it is also true that several cases allow the lowest introductory form of BB account (i.e., with the lowest deposit and daily transaction limits) to be a form of stored value “e-money” account that does not require a formal bank account to be held by the user;

(ii) Permit non-bank entities, especially those who have the credibility and security of having a banking partner in their Branchless Banking service (which is demonstrated to be the international norm) and who demonstrate responsibility in their own KYC practices, to be able to offer a “stored value account” (e-money account) which does not necessarily involve customers having to have a direct contractual relationship with any bank. Several of the best international examples offer such a start-up option, while allowing customers to graduate to a full bank account when they wish, under relevant terms and conditions.

(iii) Consider the addition of a new Level 0 which would reflect the suggestions in (ii) above and (iv), or adjust level 1 to have some more permissive conditions (new Level 0 is preferred).

(iv) Evolve appropriate regulations which reflect the reality of the future direction of Branchless Banking, while ensuring that the non-bank entities – i.e., telecom operator and/or secondary agency manager – fully meet the KYC due diligence and required AML/CFT standards. It is clear in the cases of G-Cash (Philippines) and M-Pesa (supported by the Telecom giant Vodaphone) that their Central Banks have evolved regulatory Circulars for non-bank entities to fully satisfy AML/CFT requirements that are reasonable and proportional to the need.

3.11 ADVANCING BRANCHLESS BANKING DEVELOPMENT WITHIN THE CURRENT REGULATION

3.11.1 Given the new conditions pertaining since issuance of the Branchless Banking Regulation, in which the entry of banks and telecom operators into the Branchless Banking arena is going ahead through only tentative though definite steps at the moment, the Consultant has developed a proposed approach for piloting and assistance within the accepted Branchless Banking Regulatory framework, with the following objectives:


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1. Encourage accelerated entry to Branchless Banking / m-banking by both banks and MFBs;

2. Expand the frontiers of current reach, to the outreach target clientele, i.e., the unbanked and rural areas, and products of interest to the rural population;

3. Facilitate bank – operator joint venturing and partnership, which is an essential ingredient;

4. Build experience and “maturity” (SBP’s objective) in order to accelerate also the eventual expansion into new acceptable models (i.e., to non-bank led models) in a more liberal regulatory future.

3.11.2 A pilot concept with supporting initiatives has been proposed, combining all of the above elements, by including a mandatory rural expansion, bank – telecom operator partnership, but also majoring on products of specific interest to rural clientele, such as small scale savings and payments (Level 1) and remittances, by means of an m-banking platform. The proposal recommends that the SBP, in partnership with a funding agency, should offer financial support to accelerate commercial entry into Branchless Banking / m-banking with specified products, applications and performance targets, through a subsidy competition. Banks and telecom operators would be invited to bid for one or more packages of subsidy / support against a specification that seeks out one or two best-case proposals from the industry, with good medium to long term prospects for success.

3.11.3 The Consultant has proposed that SBP approach Pakistan’s Universal Service Fund (USF) to support the pilot concept, since it has several very significant advantages and could potentially bring rapid movement. The advantages include, but are not limited to, the facts that:

(i) The USF has been established by the Ministry of IT to spread the benefits of the telecom revolution to all corners of Pakistan, to promote development of telecommunication services in un-served and under-served areas, and to make available services to progressively greater proportions of the country's population.

(ii) The USF has more than sufficient financial resources available built up over the last two years by levying 1.5 percent of the revenues of licensed operators in the telecommunications sector, and has a successful track record of holding “least subsidy” tender competitions for network roll-out and ICT services into rural areas; and

(iii) The USF has a “Special Projects” category into which various ICT services and applications are supported, which could include e-commerce and m-banking applications.

3.11.4 The Consultant met with the CEO of the USF Company to present the concept of supporting one or more Branchless Banking / m-Banking pilots. The CEO showed interest and suggested that the USF’s Board of Directors would probably


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consider the proposal favourably if a formal approach was made by SBP. However, the CEO also expressed the view that the USF would most likely prefer to consider the proposal, as an investment focused on transformative BB operations in rural areas, after seeing a BB initiative already introduced into the urban market place and building up a successful track record there over several months.

3.11.5 In view of this and in view of the consultant’s assessment that up to three banks and operators are already planning to commence BB operations in Q1/Q2 2009, it was concluded to hold the USF based pilot back, but as an initiative ready for implementation later in 2009 if required in order to increase geographical and socio-economic outreach, assuming initial commercial steps are taken by banking and telecom operators, as expected, early in the year.

3.11.6 The purpose of a delay therefore is to allow the industry players first to start up their BB initiatives and then for SBP (and possibly the Consultant) to monitor the need for intervention to accelerate progress of the services into unbanked and rural territory.

3.12 SUPPORTING ACTIVITIES

The report also includes several activities in support of the pilot concept and growth of BB generally which will provide, among other things, the pilot project development, training and capacity building, and assistance with Service Level Agreements and Service Agreements as well as technological advice. These measures were listed in Section 1.1 and guidance are provided on both of these in Annexes A and B respectively of detailed report on technology options.


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4 ALTERNATIVE FINANCING / CARBON CREDITS 4.1 Carbon financing is one of the components and activities included in the TA

program. Carbon financing provides a significant opportunity for direct investment in sustainable energy production, forestry and agriculture to mitigate climate change and to address rural poverty. The overall objective of the carbon finance component is to determine how to enhance the capacity of the country to channel carbon finance benefits to the household level. Small projects involving renewable or alternate energy resources from solar, biomass/biogas, hydro and community forestation carry a great potential and are among the opportunities for household participation in carbon finance under the CDM.

4.2 The terms of reference of the carbon financing component are;

To provide advisory support regarding international frameworks and country case studies for channeling carbon credits (grant) financing to the household level.

To conduct a feasibility study for carbon credits (grant) financing for households and the poor in Pakistan

To include a needs assessment for training and capacity building of households and external maintenance services.

4.3 Various human induced anthropogenic activities such as the burning of fossil

fuel, the depletion of sinks like forests and land use changes have disrupted the balance in the atmosphere of Green House Gasses (GHGs) such as Carbon Dioxide, Methane, Nitrous Oxide, HFCs and other naturally occurring gases. The high concentrations of GHGs are enhancing the “Green House Effect” in the form of rising global temperatures, thus contributing to Global Warming or “Climate Change”. As a result, the global temperatures are expected to increase by about 2 – 4.5 0C over the 21st Century. In South Asia, average annual temperatures could rise between 3.5 to 5.5 0C by the end of this century. These climatic changes will have considerable effect (both positive and negative) on a number of socio-economic sectors.

4.4 In June 1992, over 180 countries at the “Earth Summit” in Rio de Janeiro

adopted the United Nations Framework Convention on Climate Change (UNFCCC). This was a non-binding legal framework which aimed at stabilizing GHG in the atmosphere. The Kyoto Protocol adopted under the UNFCCC in December 1991 made the UNFCCC emission limits binding for those industrialized countries. Under the Kyoto protocol the developed countries agreed to reduce their combined greenhouse gas emissions by 5.2% (below the 1990 level) by the first commitment period 2008- 2012.

4.5 Further, a Clean Development Mechanism (CDM) was introduced under

Article 12 of the Kyoto protocol to explore cost-effective options to mitigate the impacts of climate change. This Mechanism was meant particularly for the developing countries to initiate climate friendly projects which meet the


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developing countries’ sustainable development targets whilst contributing to the ultimate objectives of the UNFCCC for reducing GHG globally.

4.6 CDM has two main objectives: (i) the project should reduce a significant

amount of GHGs which are additional to the “business as usual” case, and (ii) the project should contribute to Sustainable Development of the country and the communities. The second objective has not been given much attention and its definition remains unclear in many countries. The usually accepted sustainable criteria that a host country has to improve are

• Social well being

• Economic well being

• Environmental well being

4.7 On the other hand, small-scale community and household-based CDM

projects when implemented particularly in the area of renewable energy (biomass, wind, hydro, and solar) and energy efficiency (efficient lighting, efficient cooking stoves) have proved sustainable development benefits for the communities / households. The uptake and commercialization of these projects will help in sustainable development and in alleviating poverty in most developing countries.

4.8 CDM has given Pakistan an opportunity to finance sustainable development

projects which have potential to reduce GHGs in the atmosphere through investments in energy efficiency, renewable energy, waste management and carbon sequestration projects. In addition, this mechanism will enable Pakistan to gain a number of advantages. They are

• Provide energy sources especially for rural community and households’ independent of the GRID energy.

• Provide a source of additional foreign exchange earnings from carbon revenues. Current market rates are about USD 10 per ton of tons of CO2 Saved (CERS).

• Save foreign exchange through reduction in use of fossil fuels such as kerosene and diesel

• Help make projects viable with carbon revenues which otherwise would not have been considered as viable by investors/ lending institutions

• Attract additional private sector financing for local Sustainable Development priorities, including FDIs.

• Serve as an instrument for the transfer of “appropriate” technology.

• Help solve local environmental issues such as air and water pollution, municipal solid waste etc.

• Improve the quality of life of women and children


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4.9 The Market for CDM has gathered momentum since 2005 after the ratification of the Kyoto Protocol. By the end of 2007, about 900 projects were registered with the CDM Executive Board, and 2800 projects are in the pipeline. India has registered the highest number of CDM projects (34%) followed by China. More than USD 5 billion transactions of CERs have been done so far and the global market of USD 25-30 billion per annum can be leveraged through the CDM by 2012 (World Bank study. According to the International Emission Trading Association (IETA 2006), in order to strengthen the CDM to meet current regulatory obligations, 275 – 880 million CERs per annum are needed. This level of CER production implies about USD 15 billion of investment, which could leverage green private investment of about USD 100 billion.

4.10 About 53% of the registered projects are in the energy industry (renewable

and non-renewable energy) and the rest are in other sectors. Out of this, more than half are large scale projects (53%) and the rest are (by definition) small-scale projects that can benefit from the small-scale CDM modalities and procedures. The Marrakech Accords of 2001 classified small-scale projects as those which can reduce less than 15,000 CERs per annum or produce less than 15 GWh in the case of electricity-related projects and 45 GWh in the case of projects reducing heat / steam use.

4.11 Pakistan acceded to the Kyoto Protocol in January 2005. So far only one

project, a NO2 abatement project, has been registered. There are about 12 projects in the pipeline out of which 6 have been granted host country approval. Most of these projects are large scale as per the definition of the CDM Executive Board. Out of the 12 total projects that are in the pipeline, 8 projects are in the energy sector under power generation and/or energy efficiency. Only one of these projects is being developed by the World Bank for community based off the grid micro-hydel generation in collaboration with the Agha Khan Rural Support Program.

4.12 Pakistan has given high priority to environment protection and conservation

and therefore has incorporated GHG emission reduction strategies into National Policies. Pakistan has established a CDM cell which functions as the Designated National Authority (DNA) under Ministry of Environment and has developed a national operation strategy for CDM projects. The strategy has defined the eligible sectors and the eligibility criteria for approving CDM projects in Pakistan.

4.13 Apart from the Ministry of Environment, there are three government

institutions that are directly involved in CDM initiatives. They are the Alternative Energy Development Board (AEDB), National Energy Conservation Centre (ENERCON) and the Pakistan Council of Renewable Energy Technologies (PCRET). AEDB acts as a central agency for development, promotion and facilitation of renewable energy technologies, formulation of plans, policies and development of technological base for manufacturing of renewable energy equipment in Pakistan.


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4.14 Under the Medium Term Development Policy Framework, the Government of Pakistan has tasked the AEDB to ensure 5% of total national power generation capacity to be generated through renewable energy technologies by the year 2030. ENERCON which is a department attached to the Ministry of Environment., serves as the national focal point for energy conservation/energy efficiency activities in all sectors of the economy, namely industry, agriculture, transport, building and domestic. PCRET is engaged in coordinating Research and Development in the field of renewable energy technologies.

4.15 Most of the projects initiated by these institutions are related to energy saving,

developing alternate energy, fuel switching, waste to energy and transportation which has high CDM potential. At present Biogas digesters and mini-hydels offer the best potential in Pakistan. Already two projects, one in each of the areas are being initiated. As agriculture based country with a very large animal population, Pakistan offers great potential to develop bio mass projects which can be a useful renewable and alternate energy source. However, this potential has so far not been fully exploited despite such projects being quite common in neighboring countries like India and Nepal.

4.16 Although, several programs for biogas digesters have been launched, none of

them have been implemented very successfully. This is despite most of them being heavily subsidized by the government. Some of the main reasons identified for this are the poor quality digesters, lack of training on how to use these plants, and absence of appropriate financing facilities. Apart from the current PCRET program, under which about 2000 biogas plants are being installed, there have not been any major programs initiated either by the public or the private sector.

4.17 Various studies have identified that the potential for biogas plants in Pakistan

is about 5.0 million. The most potential exists in Punjab and Sindh. The report recommends that Pakistan initiate a national level program to install about 250,000 digesters in the short to medium term horizon. In this study it is estimated that a plant with capacity of 3-4 M3 could generate about 3.3 CERs. It is to be noted that neighbouring Nepal has embarked on a 200,000 nation-wide biogas program.

4.18 The other sector which offers the highest potential is in the micro-hydel sector.

The geography of the NWFP offers a high potential for the development of micro-hydels. Already there are several mini and micro hydro projects that are being developed in this region. But so far except for the project initiated by the AEDB and AKRSP, none of the other projects have considered CDM opportunities.

4.19 As Pakistan receives a very high level of solar irradiation, the opportunities for

using solar energy as an alternate source of energy are also very high. Although the proposed 400 village solar panel programs initiated by AEDB can be CDM eligible, the CERs generated by a solar panel are very marginal. Therefore, if this project is to generate viable quantities of CERs, an extensive


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scale of operation involving a minimum of about 500,000 households needs to be considered.

4.20 Potential also exists for small-scale wind power plants to generate energy at

household level and benefit from carbon revenues. However, the baseline and the performance of such small-scale power plants need to be determined before embarking on projects on an extensive scale.

4.21 So far energy conservation efforts have been concentrated mainly in the large

scale end of the industrial and commercial sectors. Although some energy conservation programs have been developed in the agriculture sector, they have not really cascaded down to the community and household level. Some of these can be CDM eligible and thus benefit the households. Use of CFL (energy saving) light bulbs, solar cookers, solar water heaters, and home insulation systems are some of the energy saving equipment that can bring benefits to rural communities. Such CDM projects have been successfully implemented in South Africa and Indonesia. In addition there is energy saving cooking stoves that have been developed in Pakistan and currently are in use which can help save energy,

4.22 The minimum amount of CERs needed to trade in the international market is

about 20,000 to 30,000. In all these projects, CERs generated per unit household is minuscule. Therefore in order to be able to build a critical mass of about 25,000 CERs many such small units need to be “bundled”. For this purpose a number of bundling institutions need to be set up to develop this as single project by accumulating several units.

4.23 The main barriers and constrains for the development of community and

household CDM projects have been identified as

lack of a good effective intuitional framework to initiate rural household level CDM eligible projects,

lack of a technology base to produce renewable / alternate energy saving equipment, and

difficulties in raising finances especially for the users

4.24 There are several benefits arising from implementation of CDM projects both

at the community and household levels and at national level. At the community / household level, the most common benefits are getting energy for cooking, heating and lighting at lower cost, job creation, skills developments, general improvement of health & hygiene, all of which help alleviate poverty and improve the overall living standard of the poor. At the national level among the key benefits are effective implementation of international conventions such as MDG, foreign exchange savings on account of savings in fossil fuel, such as kerosene and diesel, and poverty alleviation through employment generation.


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4.25 It is recommended that Pakistan achieve the following objectives with regard to the development and implementation of rural community and household CDM projects over the short to medium term (4- 5 year) period

(i) to develop projects in the areas already identified,

(ii) to develop a strong knowledge and a technical resource base to develop and implement CDM projects, and

(iii) to develop the institutional and financial infrastructure to enable Pakistan to optimize the opportunities and facilitate future growth in the industry

4.26 Some of the broad strategies recommended to achieve these objectives are:

awareness raising, capacity building, development of policies to encourage community / household CDM projects, development of a strong supportive institutional framework, develop programs on the most viable sectors, develop 2-3 pilots projects on focused areas (e.g. Biogas, Minihydro, solar panels), enhance the portfolio of potential products, introduce a well targeted subsidy scheme, develop financial infrastructure, and establish a carbon fund.

4.27 An institutional framework to facilitate development of household and

community based CDM projects has been suggested. Under this framework it is proposed that two separate units a) Planning unit to develop the overall policy and strategy and b) CDM promotional and monitoring unit to address operational issues be set under the Ministry of Environment.

4.28 The strategic framework proposed in this report will help the key stakeholders

to develop and implement household and community CDM projects. A capacity building framework has also been introduced where the training needs of the key institutions have been identified along with the methodology.


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5 CREDIT INFORMATION BUREAU 5.1 Five CIBs already exist in Pakistan, four private and one public, all with varying

market coverage and degrees of success. The largest and oldest is eCIB housed in State Bank of Pakistan. It requires all regulated financial institutions to report data on all their loans, both disbursements and payments. Interviews with users of the eCIB expressed differing degrees of satisfaction with the process and with the eCIB reports.

5.2 With the growth on both the demand and supply side (more borrowers and more

funds to lend) and with the new microfinance lending institutions in place (the recently established microfinance banks); there remains only one important piece of the micro-financial infrastructure missing—a credit information bureau covering the microfinance sector.

5.3 The benefits of extending coverage to the MF sector in Pakistan are extensive.

An MFCIB will

Extend outreach of credit for low income families

Mitigate poverty by expanding access to finance to women and to the entrepreneurial base of the rural areas

Strengthen the credit culture on both the lending and borrowing sides

Promote competition among MFPs, which will help reduce lending rates and extend the maturities of loans

Identify debtors and delinquents more conclusively

Provide a black list of bad borrowers

Assess the real level of indebtedness of clients, thereby avoiding over-lending

Result in lower default and delinquency rates

Reduce the instances of over-borrowing from multiple lenders

Reduce instances of fraud

5.4 The conditions for creating an MFCIB are present, including a rapidly growing

demand for small credits, strong competition among MF providers, facilitative government policies, and an awareness among all stakeholders (public and private) of the benefits of credit bureaus. An MFCIB will be a necessary ingredient in the Government of Pakistan’s program to extend access to financial services throughout the country so that poverty levels can be reduced.

5.5 There are many factors supporting the creation of an MFCIB. They include:


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The microfinance sector has huge upside potential (25-30 million borrowers) which creditors are increasingly eager to tap.

Near unanimity of opinion among stakeholders that a new CIB spanning the MF sector is greatly needed and should be created as soon as possible

The Pakistan Microfinance Network whose members account for 96% of microfinance lending is squarely supportive of a CIB.

There is unqualified support at the highest government levels for extending financial services throughout the country via MFIs.

The regulatory and legal regimes, which are usually serious roadblocks to a CIB, are generally favorable in Pakistan.

5.6 At the same time, there are a number of obstacles facing the creation of such a

commercially sustainable entity. The principal ones include

Gaps and ambiguities in the legal and regulatory environment

The financial weakness and non-commercial, poverty-alleviation approach by some significant micro-credit providers

Inaccurate and incomplete data on MF borrowers

The lack of skilled staff at microfinance institutions and varying states of MIS mismatch among MFPs

Insufficient domestic savings to finance micro-credits, and the prospect that donor funding by MFPs may dwindle. MF banks need to mobilize deposits urgently or the market could falter due to a shortage of supply of funds.

5.7 Several of the legal uncertainties facing an MFCIB will be alleviated with the

passage of the Draft Credit Bureaus Act, 2007, which is currently circulating among ministries. The consultant reviewed the Draft Act and found that it addressed many key principles and conventions needed in such a law based on international standards. However, certain omissions and contradictions need to be corrected. It is recommended that the Draft be amended as indicated and passed by the new National Assembly as soon as possible.

5.8 Estimates of the potential size and future growth rate of demand for microfinance

in Pakistan widely vary, but active participants are all quite optimistic about the trajectory. A realistic estimate of the outstanding MF portfolio nationwide at the end of 2007 would be 1.45 million active borrowers with three million anticipated by 2010. Questions remain, however, regarding the source of financing for this growth, since domestic savings are insufficient and donor funding is uncertain.

5.9 Mobile banking (or branchless banking) is likely to grow rapidly in Pakistan and

should enhance the need for and value of an MFCIB, since it will permit the


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deepening and broadening of the MFCIB data base. The growth of Islamic financial products will also help bring the unbanked into the formal system.

5.10 The role of the State Bank of Pakistan in creating, enabling, regulating and

running an MFCIB was a subject of wide discussion. A minority of views favored SBP’s active participation because the eCIB’s data are more voluminous and the infrastructure is already in place. It would be a natural extension of current activities and would save time as opposed to creating a new CIB.

5.11 However, a large majority of those interviewed held that SBP should facilitate the

creation of an MFCIB, but not own it or manage it. This view is in line with international best practice. When the state plays a major role in directing economic activity, the results are most often a skewed incentive structure and the diversion of resources. Nonetheless, it would be appropriate for SBP to take the lead in policy decisions on CIBs, to license them, to provide supervisory oversight, to make regulations on data collection and dissemination, and to ensure consumer privacy and protection.

5.12 In estimating future demand for micro credits, conservative assumptions were

used. The revenues and costs forecast for an MFCIB are based on three different levels of inquiry fees. In the two cases where fees were set below market levels, the MFCIB was either not profitable indefinitely or not profitable for its first four years. When the fee was set at commercial levels (currently PKR 60), the MFCIB became commercially sustainable in the third year even with large initial capital costs. If modest donor funds or soft loans are factored in to cover these costs, the MFCIB reaches breakeven quickly and gains credibility and legitimacy.

5.13 The Lahore pilot project, currently in the planning stage, is an important first step

toward an MFCIB. The obstacles to creating and operating an MFCIB are not enormous; it is a matter of consensus, marketing and persistence by participants.

5.14 The conclusion of this study is that given the positive market conditions listed

above, an MFCIB is quite feasible in Pakistan, assuming stakeholder perseverance, clarification of ambiguities in current regulations and laws, initial donor support, technical training of stakeholder staff, and an upgrading of MFPs’ IT and MIS.


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6 GENDER The Gender Survey was a challenging and timely effort for the IAFSP. Its challenge arose from the fact that the kind of dedicated and realistic perspective through which gender equality goals are being looked at has never before been done in Pakistan. Of course the law and order situation and terror attacks and resource availability for the survey affected the scope and continuity of the initiative. Nevertheless, there were several key dimensions which were critically and candidly discussed and recorded when interacting with MF sector players and clients. The following is a snapshot of clear and visible gender deficit in the delivery of inclusive microfinance services as reconfirmed by the survey and updated secondary research material:

i. Often there is an absence of a clearly articulated gender aware mission and objectives both in the MF NGOs as well as the MF Banks.

ii. There is inconsistency between presence of gender related strategies and policies and their implementation

iii. There is absence of gender mainstreaming tools and exercises despite repeated donor attention and MFP investment

iv. where gender strategies exist formally or informally, there was a lack of translation of these documents for the provision of “women empowerment” services,

v. there is a very clear gap in the understanding of the concept of gender sensitivity among almost all the levels of management in 95% of the MFPs

vi. there is a lax and gender blind monitoring system in almost all MFPs

vii. There is a lack of monitoring of the qualitative and even the quantitative gender indicators among almost all MFPs.

viii. There is a lackadaisical appreciation of field staff and clientele about the significance of gender equality in their social and economic development

ix. There is a popular myth among MF practitioners that being sustainable and profitable means that gender equality goals are ignored or sidelined in favor of commercially focused goals.

x. There is apparent disaffection of gender equality goals by policy makers both in the government and donor community

The solutions proposed include:

i. Holding a final event sharing these findings and re-committing ourselves to gender equality goals and their significance in peace and poverty alleviation.


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ii. Establishing two separate gender networks one for MFBs and the other for MF NGOs and involving business development service providers, academic institutions and local government as well.

iii. SBP requirement for gendered policy documents and close monitoring by SBP of gendered HR policies.

iv. Technical assistance as grant to MFBs for gendered systems and maintenance of a gendered MIS.

v. Technical Assistance as grant to MF NGOs as well as equity financing plus training of the MF NGO financial team for gendered and effective microfinance

vi. Sensitization of Senior level, Financial sector, government officials on gender equality

vii. Using mass media for awareness raising on gender equality.

viii. Pro-actively, use tools, procedures, processes, checklists and frameworks to own and internalize the gender equality goals.


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7 ISLAMIC MICROFINANCE The terms of reference of Islamic finance component required to conduct a feasibility study for developing Islamic Finance Institute / Business and Finance Academy by integrating findings of the consultative workshop on the subject and to carry out market analysis through baseline data for monitoring the microfinance sector characteristics, ultimately building strategy to enhance inclusion through Islamic microfinance. Accordingly, the Islamic finance component has been divided into two parts:

I. Islamic Microfinance Study

II. Feasibility Study of Islamic Finance Academy

I. Islamic Microfinance Study Being central to incidence of poverty, the low economic and financial opportunity limits capacity of the poor to utilize their skills for income generation. The micro-financial services have proved instrumental in alleviating poverty. However, interest based microfinance is viewed by the Muslim populations differently which are self-excluded from these programs. Owing to inability of banks and microfinance institutions to offer Islamic financial products and services, on the other hand, a good proportion of the poor has virtually not been afforded opportunity to redress their miseries of poverty and powerlessness. Only a few NGOs, making effort to operate on Islamic principles, suffer from small scale and inefficient operation, product concentration, and absence of technical capacity required for Shariah’ compliant operation. However, there is clear notion that SBP is making all out effort to promote Islamic microfinance.

The demand index of Islamic microfinance worked out through nation-wide survey conducted in 21 districts of all the four provinces ranks Mardan with highest intensity, followed by Charsadda, Peshawar, Abbottabad, Lahore, and Gujranwala. Based on demand for Islamic Microfinance, the market size has been estimated at around 5.6 million. The hypothesis that customers do not avail microfinance for religious reasons is partially proved. Those who follow the laws of Shariah closely and are more knowledgeable have credibility issues with the concept of Islamic banking and will not go for Islamic microfinance products unless there is considerable reassurance and information about the operating system. Considering poor availability of formal financial services, the population studied has sufficient spontaneous information about financial products offered in the market. The awareness has been highest (55%) for saving services, followed by 29% for micro credit while lowest for micro insurance (1%). The results prescribe that proximity of service provider, Riba free and un-collateralized product offering, pre-finance orientation, respectable communication with customers, and easy application process were preferred by respondents to be some of the characteristics of Islamic microfinance and as such should become policy drivers for Islamic microfinance. The survey also illustrates that knowledge pragmatics having good information about prohibition of Riba, supportive potentials having positive attitude towards Islamic microfinance, staunch believers, and poorly informed low potentials,


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although in low proportion (14% of the respondents) are the good market to introduce Islamic financial products. Such segments either are desirous of or can be motivated for Islamic microfinance. On Supply Side, both microfinance NGO’s and commercial financial institutions envision great deal of demand for Islamic microfinance. The core concern expressed by service providers relate to capacity building and Shariah compliant operation. That, attempt to tackle remote areas or too many geographic locations will not be helpful. It is more appropriate to begin with a closer point in space, areas closest to the nearest but inaccessible banking locations and slowly increasing the area of operation. The NGO’s are considered to be the preferred distribution channel being the existing players, however, need to bring about financial discipline prior to handling such a large scale exercise.

The resolution can be reached through integrated approach. Islamic banks should assume the role of social responsibility and develop linkage with microfinance NGOs, with prime objective of extending outreach, capacity building and fund sourcing. Social safety net, financed through Zakat, is required especially for non-enterprising poor, enabling them to graduate for microfinance. Since Islamic banks have taken lead in introducing Islamic financial system, the products and operating procedures being practiced by Islamic banks have been evaluated to assess their adaptability in microfinance. The fixed return sale based modes corresponding to the economic conditions of micro enterprises have been suggested to be offered in initial stages, followed by rent based and profit & loss sharing modes at later stage. The feasibility of Istijrar like instrument, which could be ideal for more frequent purchases have also been examined. The experience of Sudanese Islamic Bank has been particularly demonstrated to successfully operate partnership modes of Mudaraba and Musharaka by intensively working with the client households through productive family model.

The final report is based on the findings of first and second interim reports, the results of the nation-wide survey, comments of SBP on these reports, outcome of the consultative workshop, interviews/discussions held with banks and microfinance institutions, deliberations of the meeting of ADB review mission. The report also takes into account the commitment and support of SBP in developing Islamic microfinance sector. The conclusions of the report suggest products and strategies to institute Islamic microfinance at larger scale. Towards mainstreaming, in particular, the Islamic Banks may initially develop linkage with microfinance NGOs, already present in rural areas possessing experience and relationship with clients, which not only would provide cost effective mechanism but also facilitate technology transfer and capacity building.

II. Islamic Finance Academy The premise of the project of Islamic Finance Academy is to strengthen institutional capacity of providers of Islamic financial service, including those operating in rural areas or intend to expand into rural areas. The methodology for conducting feasibility study involved a consultative approach including view point of SBP and industry stakeholders


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for information collation and analysis; review of major academic and training institutions engaged in Islamic finance education at home and abroad.

The infrastructural support and growth help to understand that future prospects of Islamic finance in Pakistan are promising. Industry has been earmarked to increase its current share of around 4% to 12% of the banking system assets and deposits by 2012. The growth is primarily demand driven and the single biggest challenge for geographic and market diversification is the availability of the qualified Islamic finance professionals.

In order to sustain and diversify industry’s growth, there is an urgent need for developing available talent pool as well as for institutional capacity building within various segments and disciplines of Islamic finance. The challenge of skill development is unique to Islamic finance industry, for two reasons. First, the industry foundation is rooted in Shariah’ principles. Hence the bankers, professionals, scholars, regulators and other stakeholders need developing understanding of relevant Islamic financial laws, together with the knowledge of contemporary banking and financial market practices. Second, Islamic finance industry is constrained globally due to lack of industry standards and best practices. Pakistan is no exception. These standards/ best practices in Islamic finance are still evolving. While conventional banks are able to follow the prevalent norms in international financial markets, the Islamic finance industry is required to come up with original work for credible survival.

The industry’s capacity development requirement is sizeable, unique to individual sub-segments, and therefore demand a holistic approach in this respect. The need is for investment in training, education, and promoting a structured knowledge environment that breeds innovation. The challenge is to ensure quality and inclusiveness of such an offering, so that the industry leaves meaningful impact towards equitable economic growth.

In response to the rising demand for skilled Islamic finance professionals in Pakistan, various indigenous and international training and education institutions have started offering their services. This study analyzes a sample of five international and five local institutions against set parameters. It also reviews the performance and relevance of other infrastructure institutions.

Presently, the training / education providers are challenged on several fronts. International institutes are challenged to maintain visibility to various segments of domestic Islamic finance industry. Not being on-the-ground it has its own limitations. Client accessibility, product pricing, relevance to domestic issues, and real time response to client queries are some of the main obstacles for these players. More importantly, it is very difficult to effectively link various ‘knowledge hubs’ in the local market and leverage the resulting wealth of knowledge unless one has on-the-ground


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presence. Domestic training providers are largely scattered with limited scale and scope. Many financial institutions also provide in-house training programs to their employees. The quality of these programs ranges from average to really impressive for certain modules. The study did not come across any major efforts to promote research activities in the industry, or formal joint initiatives between the industry and academia, or a pan-industry approach to new product development and diversification to new segments. As regards undergraduate and graduate education, the International Islamic University, Islamabad is the only institute catering trained human resource to Islamic finance industry.

The study concludes several areas requiring attention. The supply-side constraints include:

(i) limited geographic coverage;

(ii) limited scope of the programs;

(iii) insignificant linkages with the industry, hence applied knowledge of Islamic finance is missing;

(iv) programs not tailored to address unique requirements of the domestic market (mostly relevant to international and industry infrastructure institutions)

(v) Non-inclusive nature of the offering (i.e. certain initiatives not having the capacity to cater to women participation).

There is convincing business case for a dedicated initiative for education, training and research services for Islamic finance industry in Pakistan. The proposed International Islamic Finance Academy (“IIFA” or “the Academy”) will be led by SBP and positioned as public-private sector initiative. The basic, all-time objectives of the Academy would be:

(i) To design and deliver quality education, training and research programs in Islamic finance targeting a range of audience in various fields and professions

(ii) To ensure that the programs are inclusive, comprehensive, demand driven and render a strong technology orientation

(iii) To uphold the religious context of Islamic finance with balanced emphasis on quality, acceptability and affordability

In the near term, the Academy will focus on building a broad stakeholder base, a bottom-up approach to curriculum development and establishing a technology-driven nationwide delivery infrastructure. Over the medium to long term, the Academy would aim to further diversify its program offering, promote collaborative research projects in liaison with other stakeholders, and actively engage in communicating and lobbying industry developments.


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In the final analysis, achieving aforementioned objectives would ensure that the Academy has a broad industry buy-in and wide market out-reach, enabling it to emerge as the primary reference point for professional excellence in Islamic finance. The Academy’s business model envisages an integrated, multi channel delivery platform (including on-site programs, distance learning technologies, web based access, etc.) that would enable nation-wide and international outreach to its target audience. Delivery excellence would be achieved based on the quality of its faculty, the technology infrastructure and broad industry linkages that are expected to be established during initial years.

With regards to the content (product program), it is noted that there is a huge repository of information on Islamic finance that is widely available in domestic and international market. Assuming the role of ‘content aggregator’. The Academy will design and package this information such that it is responsive to the evolving knowledge needs of individual target segments.

The programs will be delivered through three unique centers of excellence, catering to academic studies, professional training and research & innovation requirements of the industry. The curriculum will be designed with input from key stakeholders; hence industry linkages will be important. This will ensure that the Academy is able to cover a wide array of subjects within the Islamic finance discipline, both with current application as well as those with future potential.

In terms of its target audience, the Academy will have dual focus. Firstly, it will offer short training and certification programs to participants (individuals) towards their continued professional education. Second, the Academy will focus business schools and related institutions to complement and strengthen their post graduate offerings, executive management programs and research initiatives. The distinguishing features of the Academy would be as follows:

Industry owned initiative with broad based buy-in

Championed by SBP

Resilient financial plan

Demand driven offering

International affiliations

Local institutional capacity building

High profile faculty and trainer panel

World class infrastructure


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The academic legal and organizational structure as well as financial strategy and principle functions has been devised to achieve viable and competitive status over time.

The findings of the feasibility analysis and the proposed implementation plan duly discussed with Ministry of Finance, SBP and industry representatives conclude that implementation/ setting up of the Academy would be led by the private sector on a built-operate-transfer (BOT) basis under overall supervision of SBP. This Implementation Project would be a three year turnkey mandate.

The implementation plan would require formal approval of the Final Report by MOF, SBP and ADB, followed by SBP’s invitation to private sector to provide professional services to operationalize the Academy. RFP to cover all major aspect of the project including setting up operational infrastructure, supporting fund raising campaign, developing membership/ alliance program, establishing marketing and communication plan, technology infrastructure, program design and leading to a soft launch of the Academy. Interested parties would be required to demonstrate their credentials in venture development, capital placement and academic program development.

In parallel, SBP would constitute a seven member Steering Committee comprising of two representatives from SBP (preferably including the Governor), three executives from Islamic financial institutions and two from leading academic financial institutes offering higher education in Islamic finance. Steering Committee would be responsible for evaluating proposals and awarding Project Implementation. Subsequently, the Steering Committee would assume the role of the first Board of Directors of the Academy (once the legal structure is in place). Governor SBP would be the permanent Chairman of the BOD.


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8 LEGAL AND REGULATORY FRAMEWORK 8.1 Under the ADB-IAFS Project the legal experts have been requested to look at the

MFI Ordinance 2001 (as amended up to 1 July 2007) that will regulate MFB’s, as well as at its accompanying regulations, policies and guidelines.

8.2 Some of the comments and recommendations of the legal experts concern the

following issues:-

The legal character of the law under the current provisional constitution;

The consistency of the law with its objective under financial law and business rather than under social policy (poverty alleviation);

Protecting the interests of MFB clients (consumer protection);

The coherence and clarity of the structure and text of the law as such, in the interest of its full compliance and in the interest of ensuring the authority and credibility of SBP;

Ensuring full compliance of the law also means that breaches and their respective penalties (and the procedures to enforce them and appeal against them) need to be properly structured and phrased;

The objective of the law and the regulatory framework is to support poor people’s sustained advancement through their integration into professional financial intermediation. Definitions determining who poor persons are and maximum loan sizes bear risks of hindering that financial sector strategy;

It is globally established that providing non-financial services as part of its (core or “allied”) business bears risks on achieving sustainability of MF as a business and may confuse stakeholders and the general public;

The litmus test for the success of MFB’s is their performance in attracting voluntary savings from the public, especially from poor and rural citizens. Such success can only be achieved when MFBs are trusted by the local public, including local banks and businessmen. Such trust can only be gained when MFB’s decide to get the major part of their funding from popular savings. Funding strategies that still focus on government and foreign donors and on obtaining money mainly at below market conditions have often proven to be an obstacle to changing resources and operations of MFIs and trying to convince the general public of their strong performance;

Transfer services, payments and remittances are also priority services which are demanded by particularly poor and rural citizens from financial institutions. Such services support their lives and that of their families and are necessary for their businesses. MFB’s can only be allowed to undertake such services when these organizations demonstrate their safety, rapidity and accuracy in reporting (on cash flow, liquidity) ;


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The creation of a Deposit Insurance Fund for MFBs that have just started or are only thinking of collecting and on-lending voluntary public savings, bears the risk of moral hazard. As there is a guarantee for those savings they will feel less incentive to ensure poor people’s savings deposits themselves. Furthermore, only a part of profits are legally demanded for funding such fund, which means that all except one of the current 8 MFBs will be required to finance it. Most savings in the sector are now being collected by loss-making MFB’s. Finally, with a Deposit Insurance Fund clients that need deposit and savings services do not feel the incentive anymore of carefully selecting the MFB of their choice, a phenomenon called “adverse selection”.

8.3 SAVINGS AND CREDIT UNIONS 8.3.1 This is a proposed Action Plan for the creation of Savings & Credit Unions in

Pakistan. SCUs (that in legal terms are “cooperative societies”, not “companies”) are essential pillars for financial sector inclusion in many countries all over the world. Having analyzed the past failure of financial cooperatives in its past, the consultant is convinced that SCUs can be successfully “revitalized” in Pakistan. But SCUs can only realize their potential in this country when communities who have no easy access to traditional commercial banks and MFB’s, especially in rural and remote areas, are allowed to build an autonomous financial intermediation system by and for themselves that grows on the basis of voluntarism (own initiative, free will, own commitment, own capital) and profitability (business performance).

8.3.2 Profitability is the only performance signal demonstrating rigorous risk and

liquidity management as well as sustained growth of (M) FIs. As cooperative societies, SCUs are also allowed to make profits, but these profits need to be reinvested in the SCUs themselves, not distributed amongst the (members) shareholders. This principle needs to be part of the specific legal statute Cooperative societies have and is based on their particular characteristics that require registration and monitoring by authorities knowledgeable about cooperatives. In Pakistan only the provincial Cooperatives Registrar can perform that role. SCUs that have arrived at a certain level of financial performance (when they bear risks on the financial system and on public savings) need to be supervised by SBP. This means that an SCU Action Plan requires close collaboration between SBP and the Cooperatives Registrars. It also requires a coherent and consistent regulatory and supervisory framework that can effectively monitor SCUs gradual evolution and that can correct irregularities at an early stage.

8.3.3 The consultant identifies four basic conditions for the successful establishment

of SCUs in Pakistan, each one being responsible for producing concrete outputs. In explanation of the action plan, the report gives and explains the definition of SCUs, the main risks they face and how to best manage them.


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Legal modifications and specific prudential norms are required and proposed for the latter purpose. Finally, the consultant proposes a detailed implementation plan.

8.3.4 In addition to that consultants also review/advise:

Regulatory framework important for Micro-Finance services providers;

Partnerships between Pakistan Post and Micro-Finance Banks;

Propose an Action Plan for the revitalization of credit unions;

Propose a Plan for supporting the increase of sustainable Micro-Finance (especially in rural areas) with a Community Investment Fund and the smart use of Subsidies;

Provide technical assistance on regulatory issues as regards the development of new technology that supports lowering costs of funds transfers and remittances.

8.3.5 Analyzing the Pakistan Post Office organization and its financial services, the expert found that this public service organization is the largest MF services provider by far, collecting a large volume of savings (through products of the Post, the Savings Bank and the National Savings Directorate), undertaking a huge number of different money transfer services, and providing life insurance and loans. The Post recently entered into a cooperation agreement with a micro-lender, FMFB and it seems to consider providing loans on its own. According to the legal experts, some issues in the collaboration with FMFB seem unresolved and require further attention. He discussed his findings with Post and FMFB who agreed to collaborate closely to resolve several issues identified by the expert. The international legal expert prepared a strategic note on possible Post and Microfinance Bank partnerships. Based on legal documents available to him and based on his experience in other countries and with international organizations dealing with the (potential) role of Post in MF, the international legal expert provided a framework for SBP concerning the legal and strategic issues that concern this collaboration.

8.3.6 Cooperative societies have over the world always attracted a lot of attention as

an ideal legal form to organize financial services provision for poor, rural people and small businesses. Pakistan has witnessed experiments with cooperative banks which resulted in the closure of nearly all of them and in huge losses of government money and people’s trust, especially of poor and rural citizens. This past notwithstanding, SBP is looking at revitalizing the credit unions (that are cooperative societies in legal terms). The expert reviewed SBP’s CU paper that was written based on international papers (in particular from WOCCU) and work of the expert done during his first mission. The expert then developed principles on CUs to be set up in Pakistan. On the


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basis of these CU principles and with the reviewed SBP CU document, he designed a possible CU program with implementation plan.

8.3.7 With the advice of the strategy expert, the legal expert proposed a specific, step

by step plan for creating a Community Investment Fund that uses Smart Subsidies for accelerating financial inclusion in the country keeping in view the international best practices within the Pakistani context. In his paper he included proposals for the possible use of subsidies for general financial literacy training and the reviving of CUs.

8.3.8 Finally, the expert advised the team’s international Branchless Banking expert on

legal issues on BB and accompanied him to the BB seminar that was organized by SBP on 15 August 2008. His advice has been endorsed by the BB expert and included in the report.

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