Report and Recommendation of the President to the Board of Directors

Project Number: 52124-001 January 2019

Proposed Loan Expanding Access to Credit for Women ()

This is an abbreviated version of the document approved by ADB's Board of Directors that excludes information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy.

CURRENCY EQUIVALENTS (as of 12 November 2018)

Currency unit – Pakistan rupee/s (PRe/PRs)

PRe1.00 = $0.0075 $1.00 = PRs133.83

ABBREVIATIONS

ADB – Asian Development Bank BDO – business development officer GAP – gender action plan GDP – gross domestic product MFB – bank MFI – microfinance institution MSMEs – micro, small, and medium-sized enterprises NBFC – nonbanking finance company NPL – nonperforming loan PMN – Pakistan Microfinance Network SECP – Securities and Exchange Commission of Pakistan

NOTES

(i) The fiscal year (FY) of Kashf Foundation and of the Government of Pakistan ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2018 ends on 30 June 2018.

(ii) In this report, “$” refers to United States dollars.

Vice-President Diwakar Gupta, Private Sector and Cofinancing Department Director General Michael Barrow, Private Sector Operations Department (PSOD) Director Christine Engstrom, Financial Institutions Division, PSOD

Team leader Tina Rohner, Investment Specialist, PSOD Team members Pierre Bailet, Principal Counsel, Office of the General Counsel Ka Seen Gabrielle Chan, Safeguards Specialist, PSOD Asif Cheema, Principal Investment Specialist, PSOD Shaheryar Ali Choudhry, Senior Investment Officer, Pakistan Resident Mission, PSOD Tarang Khimasia, Senior Guarantees and Syndications Specialist, PSOD Manfred Kiefer, Senior Economist, PSOD Mohsin Monnoo, Senior Investment Specialist (Syndications), PSOD Raneliza Samiano, Safeguards Officer, PSOD Grachelle Talicuran, Associate Safeguards Officer (Environment), PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE FINANCIAL INTERMEDIARY 1 A. Investment Identification and Description 1 B. Business Overview and Strategy 3 C. Ownership, Management, and Governance 4 III. THE PROPOSED ADB ASSISTANCE 5 A. The Assistance 5 B. Implementation Arrangements 5 C. Value Added by ADB Assistance 6 IV. DEVELOPMENT IMPACT AND STRATEGIC ALIGNMENT 6 A. Development Impact, Outcome, and Outputs 6 B. Alignment with ADB Strategy and Operations 6 V. POLICY COMPLIANCE 7 A. Safeguards and Social Dimensions 7 B. Anticorruption Policy 8 C. Assurances 8 VI. RECOMMENDATION 8

APPENDIXES 1. Design and Monitoring Framework 9 2. List of Linked Documents 11

Project Classification Information Status: Complete

PROJECT AT A GLANCE

1. Basic Data Project Number: 52124-001 Project Name Expanding Access to Credit for Department PSOD/PSFI Women /Division Country Pakistan

Borrower Kashf Foundation (KF)

qq 2. Sector Subsector(s) ADB Financing ($ million) Finance Inclusive finance 15.00 Total 15.00 qq 3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic Pillar 2: Access to economic Climate Change impact on the Project Low growth (IEG) opportunities, including jobs, made more inclusive Qq 4. Drivers of Change Components Gender Equity and Mainstreaming Private sector Promotion of private sector Gender equity (GEN) development (PSD) investment qq 5. Poverty and SDG Targeting Location Impact Geographic Targeting No Rural High Household Targeting No Urban Medium SDG Targeting Yes SDG Goals SDG1, SDG5, SDG10 qq 6. Nonsovereign Operation Risk Rating Obligor Name Obligor Risk Rating Facility Risk Rating Kashf Foundation (KF) 7. Safeguard Categorization Environment: FI-C Involuntary Resettlement: Indigenous Peoples: FI-C FI-C Qq 8. Financing Modality and Sources Amount ($ million) ADB 15.00 Nonsovereign LIBOR Based Loan (Regular Loan): Ordinary capital resources 15.00 Cofinancing 10.00 Others 10.00 Others a 0.00 Total 25.00

Currency of ADB Financing: USD

a Derived by deducting ADB financing and Cofinancing from Total Project Cost.

Source: Asian Development Bank This document must only be generated in eOps. 19112018155500972171 Generated Date: 07-Jan-2019 8:51:54 AM

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan of up to $25,000,000, comprising (i) an A loan of up to $15,000,000 and (ii) a B loan of up to $10,000,000, to Kashf Foundation for Expanding Access to Credit for . The B loan will be syndicated by the Asian Development Bank (ADB) to impact investors and other eligible participants on a best-effort basis, subject to market conditions.

2. The loan will support Kashf Foundation’s lending to low-income women, female micro- and small entrepreneurs and low-cost schools in Pakistan. An increase in Kashf Foundation’s capacity to provide critically needed financial products to this underserved segment will (i) significantly improve the financial access of women, especially those belonging to poor rural households; and (ii) help improve and sustain their livelihood and incomes. The ADB loan will also support the diversification of Kashf Foundation’s funding base and strengthen its balance sheet by providing longer-tenor financing, thereby enabling it to provide longer-maturity financial products to its clients.

II. THE FINANCIAL INTERMEDIARY

A. Investment Identification and Description

3. The long-run gross domestic product (GDP) growth of Pakistan is characterized by repeated cycles of rapid growth followed by slowdowns. After expanding at an average GDP growth rate of 6.2% during FY2003–FY2008,1 GDP growth slowed during FY2008–FY2013 to an average rate of 3.0% because of a challenging investment climate, high inflation, and an unresolved energy crisis.2 Pakistan’s economy has gained positive momentum since FY2014, and GDP grew 5.8% in FY2018—the highest growth since FY2007.3 ADB projects GDP growth of 4.8% for FY2019, in light of the pressing need to deal with large budget and external imbalances.4

4. Finance sector. The finance sector in Pakistan is underdeveloped and characterized by low access to finance primarily because of heavy investment by banks in government securities and risk aversion of certain customer segments. Total bank assets increased 15.9% in FY2017 to PRs18,342 billion. Customer deposits grew 14.4% from PRs11,798 billion in FY2016 to PRs13,012 billion in FY2017. Net advances grew 18.4% from PRs5,499 billion in FY2016 to PRs6,512 billion in FY2017, but remain at 35.5% of total banking industry assets in Pakistan.5 The loan–deposit ratio for the Pakistan banking industry was 50.1% in FY2017 compared with 73.3% in India and 87.7% in . The capital adequacy ratio of the industry was 15.8% at the end of FY2017 under the Basel III standard as compared with 15.9% at the end of FY2016.6

1 Government of Pakistan, Ministry of Finance, Finance Division. 2008. Pakistan Economic Survey 2007–08. . 2 Government of Pakistan, Ministry of Finance, Finance Division. 2016. Pakistan Economic Survey 2015–16. Islamabad. 3 Government of Pakistan, Ministry of Finance, Finance Division. 2017. Pakistan Economic Survey 2017–18. Islamabad. 4 ADB. 2018. Asian Development Outlook 2018 Update: Maintaining Stability Amid Heightened Uncertainty. Manila. 5 , Financial Stability Department. 2018. Quarterly Compendium: Statistics of the Banking System. Karachi. 6 Basel III is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision and risk management within the banking sector.

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5. Microfinance. Microfinance plays a vital role in the country’s finance sector, as it addresses market gaps. Pakistan has 52 entities with microfinance operations. These are mainly microfinance banks (MFBs), microfinance institutions (MFIs), rural support programs, and other entities with microfinance operations as part of their multidimensional service offering. MFBs provide credit; take deposits from the general public; and are regulated by the central bank, the State Bank of Pakistan. MFIs provide to clients but do not raise deposits from the general public. Rural support programs provide microcredit as part of an array of service offerings.7

6. Since 2005, microfinance has grown nearly 12 times in terms of borrowers and 29 times with respect to outstanding credit, with about equal growth from MFBs and MFIs.8 As of the second quarter of 2018, outstanding credit in the microfinance industry had reached PRs239 billion. The industry targets increasing the active borrower base of microfinance entities from 6 million in 2017 to 10 million by 2020.9 Most clients of microfinance entities are females, who constituted 53% of active borrowers as of FY2017. The urban–rural ratio of active borrowers was 47:53 during the fourth quarter of 2017.10

7. MFIs, including Kashf Foundation, are regulated by the Securities and Exchange Commission of Pakistan (SECP) and provide finance to two defined categories of borrowers: (i) Poor person. Nonbanking finance company (NBFC) regulations define a poor person as an individual with meager means of subsistence and whose total business income, excluding expenses, during a year is less than or equal to PRs600,000 or such other minimum limit as may be prescribed from time to time; and (ii) Microenterprises. NBFC regulations define microenterprises as projects or businesses in trading, manufacturing, services, or agriculture that lead to livelihood improvement and income generation. These projects or businesses are run by micro-entrepreneurs who are self-employed or employ no more than 10 individuals, excluding seasonal labor.

8. The SECP also imposes maximum MFI lending requirements of PRs200,000 for a general loan to an individual, PRs500,000 for a housing loan to an individual, and PRs500,000 for a loan to a microenterprise. The maximum exposure per borrower must not exceed PRs700,000.11 As of August 2018, the SECP regulated 25 NBFCs.

9. Access to finance is very limited. According to World Bank estimates, as of FY2017, only 21.3% of Pakistani adults and 7.0% of women over the age of 15 had a bank account with a formal financial institution or mobile money service provider. This is well below the account ownership rate of 50.1% (overall population) and 35.8% (women) in Bangladesh and 79.9% (overall) and 76.6% (women) in India.12 About 86% of the population in Pakistan has no access to formal financial services; 56% of adults in Pakistan use neither formal nor informal products

7 Pakistan Microfinance Network (PMN). 2018. MicroWatch: A Quarterly Update on Microfinance Outreach in Pakistan. Issue 48. Islamabad. 8 PMN. 2006. MicroWatch: A Quarterly Update on Microfinance in Pakistan. Issue 01. Islamabad. 9 A.A. Ghangro and N. Khan. 2015. Estimating Potential Market Size for Microcredit in Pakistan. MicroNOTE. 27 December. 10 PMN. 2017. MicroWatch: A Quarterly Update on Microfinance Outreach in Pakistan. Issue 46. Islamabad. 11 Credit exposure can be verified through the State Bank of Pakistan-operated Credit Information Bureau or four privately owned credit bureaus. MFIs regularly report to the SECP. 12 World Bank. World Bank Open Data (accessed 26 November 2018).

3 and, while 36% of adults save, only 4% save at a formal financial institution. Similarly, one-third of adults borrow money, but only 3% borrow from a formal financial institution.

10. Access to finance is particularly constrained for micro, small, and medium-sized enterprises (MSMEs) and individual micro-borrowers, including farmers. Banks in Pakistan tend to be selective in risk-taking with a clear preference for providing working capital and trade finance to large corporations with lower risk profiles and an aversion to lending to small and medium- sized enterprises (SMEs). Access to finance for microenterprises, particularly microenterprises run by women, is even more limited and remains largely unmet by the formal finance sector. The limited supply of credit to microenterprises is a major concern to policy makers in Pakistan. As of FY2016, MSMEs received only 7% of total bank credit to the private sector but contribute 40% to GDP.13 As of FY2017, MSMEs are estimated to account for 98% of all enterprises in Pakistan and employ more than 80% of the nonagricultural labor force.

11. Investment rationale. ADB met with several banks and NBFCs in 2017 to identify candidates for funding due to the very low credit extended to the private sector, specifically to MSMEs and female borrowers, and the importance of MSMEs in general and women, more specifically, to economic growth and poverty alleviation in Pakistan. ADB signed a loan of up to $20 million to Khushhali Microfinance Bank in 2017 to support MSMEs; the loan is pending disbursement.14 To further expand ADB’s support of the banking and microfinance sector in Pakistan, ADB also entered into discussions with a number of other financial institutions, including Kashf Foundation. Kashf Foundation stands out as one of the few MFIs with a long and successful record of lending to female micro-borrowers. Kashf Foundation also has the highest percentage of female borrowers in Pakistan. It has multiple branches across 50 districts in Pakistan and is ideally positioned to use ADB funding to improve access to finance for underserved women. Of Kashf Foundation’s clients, 99% are women, and households headed by women are given priority. Kashf Foundation also offers mandatory health insurance to its borrowers, as well as educational seminars and programs, all of which contribute to its leading position in Pakistan’s microfinance industry.

B. Business Overview and Strategy

12. Established in 1996 as a microfinance service provider, Kashf Foundation launched microfinance services in 1999. Its objective is to reduce poverty and empower women by providing quality and cost-effective microfinance services to low-income households. Modeled after in Bangladesh, Kashf Foundation is also a partner institution of the Grameen Foundation in Pakistan. Kashf Foundation transitioned to a nonprofit company in February 2007 and obtained an NBFC license in October 2016 from the SECP. As of June 2018, Kashf Foundation served 412,983 clients and had a gross loan portfolio of PRs10,513 million, with total assets of PRs14,378 million. Target clients are households with monthly incomes of PRs3,500– PRs27,500, a low asset base, vulnerable sources of income, or a high dependency ratio.15 As of FY2018, Kashf Foundation’s distribution network comprised 291 branches across 50 districts in Pakistan. While since its founding Kashf Foundation has focused on commercially active cities and small towns, it put a rural strategy in place in 2016. Kashf Foundation had opened 10 rural branches as of FY2018 and plans to expand rural lending.

13 M. Pasha. 2016. What Will It Take for Pakistan to Achieve Financial Inclusion? World Bank. Washington DC. 14 ADB. 2016. FAST Report: Loan to Khushhali Bank Limited for Expanding Access to Credit for Agriculture and Micro, Small, and Medium-Sized Enterprise Borrowers in Pakistan. Manila. Disbursement was delayed due to exchange rate volatility and is expected to disburse in 2019. 15 Dependency ratio is the ratio of nonworking-age individuals to working-age individuals.

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13. Kashf Foundation has a diversified loan portfolio consisting of the following products: (i) Individual loans. Loans to individuals to support new or existing businesses, ranging from PRs30,000 to PRs100,000, make up 95% of Kashf Foundation’s total portfolio. Each loan has a 1-year maximum tenor repayable in 12 monthly installments. The loans are unsecured, but postdated checks are a mandatory requirement. (ii) Easy loans. Loans at 12-month tenors and up to PRs15,000 are available to female clients who need small loans quickly for business and nonbusiness expenses. (iii) School investment loans. Support for the education sector consists of technical and financial assistance for low-cost private schools to improve education infrastructure and the quality of education. Loan amounts to schools range from PRs60,000 to PRs300,000 with a maximum tenor of 18 months. (iv) Islamic product: Offered in Khyber Pakhtunkhwa, shariah compliant loans range from PRs30,000-PRs100,000. The maximum tenor of such a loan is one year with repayment in 12 monthly installments. (v) Life insurance loans and health insurance. Kashf Foundation provides life insurance for its clients and has sold health insurance products to more than 1.5 million clients. Kashf Foundation is a pioneer in Pakistan in providing micro health insurance. Every borrower must participate in Kashf Foundation’s health insurance scheme. (vi) Nonfinancial products. Kashf Foundation also offers services such as basic financial literacy training, systemized financial education training, business incubation laboratories, vocational training, child safeguards training, and a gender empowerment program.

14. Kashf Foundation expects its loan portfolio to grow from PRs10,513 million in FY2018 to PRs29,119 million by the end of FY2020. Total individual clients served are projected to increase from 412,983 as of FY2018 to more than 1 million by June 2020. To achieve these operational levels, the distribution network is projected to reach 370 branches by 2021, as Kashf Foundation plans to increase penetration in Punjab and expand operations in Sindh, Baluchistan, and Khyber Pakhtunkhwa. The individual loan product will initially be made available in the new service areas, and the expansion will provide geographical diversification in the portfolio.

15. Kashf Foundation is assessing the addition of seven new products, including a product for SMEs. Kashf Foundation’s growth strategy is supported by ongoing investment in information technology infrastructure and a rigorous training program for new staff. As part of its digital finance strategy, Kashf Foundation has provided tablet computers to all loan officers and has converted all branches to cashless branches. It is exploring the implementation of a credit scoring model, further digitization of services, and the use of data analytics in the lending process. Kashf Foundation estimates that it will require PRs24 billion in additional funding until FY2020 to meet its growth and disbursement targets.

C. Ownership, Management, and Governance

16. Ownership. Kashf Foundation is a nonprofit NBFC registered under Section 42 of the Companies Ordinance 1984 and regulated by the SECP. The memorandum of association of Kashf Foundation outlines the legal structure of the company, which does not have shareholders because of its nonprofit structure. Instead, Kashf Foundation has members who have a maximum individual liability of PRs50,000. Initial members of the company were those individuals who subscribed to the memorandum of association at the time of its formation. Of the 10 founding

5 members, 6 have resigned, and Kashf Foundation’s board of directors has admitted 8 new members. Integrity due diligence was conducted.16 No significant or potentially significant integrity risks were identified. Tax integrity due diligence was not required.

17. Management. Kashf Foundation’s management team has extensive experience in finance, banking, social development, accounting, and auditing; it also has a long record in the local banking and microfinance market. Senior oversight is led by , Kashf Foundation’s chief executive officer and founder, and four other senior managers. Zafar is widely known in Pakistan’s microfinance industry and has received many global awards for her work and advocacy. Before establishing Kashf Foundation, Zafar worked with the World Bank in Islamabad in the water and sanitation department for several years.

18. Governance structure. Kashf Foundation is governed by a ten-member board of directors. The board is chaired by Mueen Afzal, who has been with Kashf Foundation since 2013 and has held high-level positions in the civil service of Pakistan since 1964, including finance secretary and finance and economic affairs secretary general in the Government of Pakistan. The board also has eight independent voting directors with diverse experience, including senior positions in the private sector.

CONFIDENTIAL INFORMATION DELETED

III. THE PROPOSED ADB ASSISTANCE

A. The Assistance

19. ADB will provide a senior unsecured loan to Kashf Foundation of up to $15,000,000. ADB expects to syndicate a B loan of up to $10,000,000 by mobilizing impact investors and other eligible B loan participants, subject to market conditions.

B. Implementation Arrangements

20. Use of proceeds. Kashf Foundation will use the proceeds of ADB’s loan to finance low- income women, female micro- and small entrepreneurs in Pakistan, and low-cost private schools.

21. Reporting arrangements. ADB’s Private Sector Operations Department will carry out project monitoring. Kashf Foundation will provide ADB with financial reports at predetermined regular intervals and as requested, including (i) annual audited financial statements; (ii) quarterly unaudited financial statements; (iii) quarterly compliance certificates for loan covenants; (iv) semiannual reporting on the loan portfolio; and (vi) annual reporting on environment and social performance, including the development indicators specified in the gender action plan (GAP) agreed by ADB and the borrower.

22. Evaluation. Monitoring reports will be prepared and submitted to ADB regularly, and at least annually. The first report will be submitted no later than 12 months after the first disbursement.

16 ADB. 2003. Enhancing the Asian Development Bank's Role in Combating Money Laundering and the Financing of Terrorism. Manila.

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C. Value Added by ADB Assistance

23. Broaden access to finance for women. Access to finance for women in Pakistan is still severely limited. ADB’s funding will help broaden access to formal institutional finance for micro- borrowers, whose only alternative of access to finance is the often exploitative and expensive informal finance sector. The project will promote lending to women as a financial approach and will support employment and income-generating activities. Kashf Foundation has agreed to implement the GAP to further enhance support for female borrowers.

24. Provide longer-tenor debt for a nonprofit nonbanking finance company. As a non- deposit-taking NBFC, Kashf Foundation must continuously diversify its funding base. The management team’s strategic plan focuses on diversifying and growing Kashf Foundation’s loan portfolio and rolling out new products, which may have relatively longer tenors. Since Kashf Foundation needs additional sources of longer-tenor financing, ADB’s loan will provide longer- tenor funds to help Kashf Foundation diversify its product portfolio.

25. Catalyze private sector financing. ADB will provide a B loan and mobilize additional private sector financing that Kashf Foundation needs to support its growth strategy and diversify its funding sources.

CONFIDENTIAL INFORMATION DELETED

IV. DEVELOPMENT IMPACT AND STRATEGIC ALIGNMENT

A. Development Impact, Outcome, and Outputs

26. Impact. The project supports the government’s Pakistan 2025 vision, which promotes, among other things, access to finance, financial inclusion, and increased availability of financial instruments.17 It also supports the vision statement of the State Bank of Pakistan, which outlines how microfinance could be transformed into a dynamic industry that is integrated into the overall financial system, providing inclusive financial services to underserved economic and geographic segments through self-sustaining business models and demand-driven products, while keeping high governance and service delivery standards, supported by an agile regulatory environment.18

27. Outcome. The outcome of the project is an increased use of sustainable microfinance by women in Pakistan.

28. Outputs. The project will (i) improve Kashf Foundation’s ability to serve female borrowers, and (ii) improve the quality of education of the schools supported by Kashf Foundation.

B. Alignment with ADB Strategy and Operations

29. Consistency with ADB strategy and country strategy. The project supports the following key operational priorities of ADB’s Strategy 2030: (i) addressing remaining poverty and reducing inequality, (ii) promoting rural development, and (iii) accelerating progress in gender

17 Government of Pakistan; Ministry of Planning, Development and Reform; Planning Commission. 2014. Pakistan 2025: One Nation - One Vision. Islamabad. 18 State Bank of Pakistan, Microfinance Department. 2011. Strategic Framework for Sustainable Microfinance in Pakistan. Karachi.

7 equality through the GAP.19 The loan contributes to finance sector development by supporting the growth of an MFI, with microfinance being a vital component of Pakistan’s finance sector. Without access to formal financial services, low-income people or underserved segments, specifically women, will be excluded from the growth process and its benefits. This is consistent with ADB’s country partnership strategy for Pakistan, 2015–2019, which prioritizes inclusive growth by supporting financial services to segments whose access to finance is limited.20 ADB's activity in Pakistan's finance sector began in 2000 with the Microfinance Sectors Development Program, which concluded in 2008.21 Finally, the project is aligned with ADB’s Gender Equality and Women’s Empowerment Operational Plan, 2013–2020.22

30. ADB’s participation in the project will help borrowers, who are predominantly from poor households, access financial services, which will contribute to the improvement of their living conditions. As ADB’s financing helps enable access to such finance, the project is classified as inclusive business. The project also has high development impact and contributes to the achievement of Sustainable Development Goal 10 on reducing inequality within and among countries.

V. POLICY COMPLIANCE

A. Safeguards and Social Dimensions

31. ADB has categorized the investment in compliance with ADB’s Safeguard Policy Statement (2009).23

32. Category FI (treated as C). ADB has assessed the transaction's potential environmental and social impacts, risks associated with Kashf Foundation’s existing and/or likely future portfolio, and commitment and capacity for environmental and social management. Kashf Foundation has in place a screening mechanism with a business exclusion list and requires all clients and their business activities to comply with Pakistan laws and regulations.24 Kashf Foundation has a mechanism to monitor client activities though its staff at different levels. BDOs visit clients within 45 days after loan approval to confirm loan use, and branch managers and compliance officers also visit a random sample of clients. Kashf Foundation has an environmental policy to reduce its direct and indirect impacts. It also has whistle-blowing and grievance policies as well as open hotlines for issues related to Kashf Foundation activities; such issues are reported regularly to management.

33. Given the size, tenor, and nature of Kashf Foundation’s loans, transactions under Kashf Foundation will have minimal or no adverse environmental impacts and are unlikely to entail impacts on involuntary resettlement and indigenous peoples. In addition to its current system, Kashf Foundation will (i) apply ADB's prohibited investment activities list to its existing business exclusion list; (ii) exclude activities with category A and B environment and social safeguard

19 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 20 ADB. 2015. Country Partnership Strategy: Pakistan, 2015–2019. Manila. 21 ADB. 2008. Completion Report: Microfinance Sector Development Program in Pakistan. Manila. The program led to the establishment of Khushhali Microfinance Bank, which catalyzed the establishment of other MFBs. It also developed government policies, laws, and regulations to facilitate the growth of microfinance services in Pakistan. 22 ADB. 2013. Gender Equality and Women’s Empowerment Operational Plan, 2013–2020: Moving the Agenda Forward in Asia and the Pacific. Manila. 23 ADB. Safeguard Categories. 24 The list excludes certain businesses, such as those that provide tobacco training programs, those that are involved in gambling and the handling of hazardous chemicals, and breweries.

8 impacts; (iii) ensure that investments using ADB funds comply with ADB’s Safeguard Policy Statement and abide by applicable national laws and regulations, including labor laws, pursuant to ADB’s Social Protection Strategy (2001); and (iv) take measures to comply with internationally recognized core labor standards. Kashf Foundation will confirm this in its periodic reports to ADB and need not apply any other specific safeguard or social requirements.25 34. Gender equity as a theme. Following ADB’s Policy on Gender and Development (1998), Kashf Foundation has incorporated measures to promote gender equality and/or women’s empowerment in its business activities. ADB and Kashf Foundation prepared the GAP to support the project’s gender equity as a theme classification. Key features of the GAP are increased provision of microloans and additional financing products to women, increased loan facilities to improve education infrastructure, and provision of training on gender-responsive delivery of customer service for new staff and training on financial literacy for female borrowers. Kashf Foundation will submit periodic reports on the implementation of gender measures to ADB.

B. Anticorruption Policy

35. Kashf Foundation was advised of ADB’s policy of implementing best international practice relating to combating corruption, money laundering, and the financing of terrorism. ADB will ensure that the investment documentation includes appropriate provisions prohibiting corruption, money laundering, and the financing of terrorism; and remedies for ADB in the event of noncompliance.

CONFIDENTIAL INFORMATION DELETED.

C. Assurances

36. Consistent with the Agreement Establishing the Asian Development Bank (the Charter),26 ADB will proceed with the assistance upon establishing that the Government of Pakistan has no objection to the proposed assistance to Kashf Foundation. ADB will enter into suitable finance documentation, in form and substance satisfactory to ADB, following approval of the proposed assistance by the Board of Directors.

VI. RECOMMENDATION

37. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of up to $25,000,000, comprising (i) an A loan of up to $15,000,000 from ADB’s ordinary capital resources and (ii) a B loan of up to $10,000,000, to Kashf Foundation for Expanding Access to Credit for Women in Pakistan, with such terms and conditions as are substantially in accordance with those set forth in this report, and as may be reported to the Board.

Takehiko Nakao President 11 January 2019

25 Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2). 26 ADB. 1996. Agreement Establishing the Asian Development Bank. Manila.

Appendix 1 9

DESIGN AND MONITORING FRAMEWORK

Impacts the Project is Aligned with

Access to finance, financial inclusion, and increased availability of financial instruments promoted (Pakistan 2025: One Nation - One Vision)a

Microfinance transformed into a dynamic industry and integrated into the overall financial system, providing inclusive financial services to the underserved economic and geographic segments through self-sustaining business models and demand-driven products, while maintaining high standards of governance and service delivery, supported by an agile regulatory environment (Strategic Framework for Sustainable Microfinance in Pakistan)b

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks Outcome By 2023 Use of sustainable a. Number of microloans outstanding a–b. Kashf Foundation Changes in microfinance by to women increased annual development regulatory women in Pakistan effectiveness monitoring environment increased b. Number of microloans outstanding reports to businesses owned by women Decreased increased demand for microfinance products Outputs By 2022 1. Kashf 1a. microloans disbursed annually to 1–2. Kashf Foundation High increase Foundation’s ability women annual development in interest and to serve female effectiveness monitoring inflation rates borrowers improved 1b microloans disbursed annually to reports businesses owned by women

1c. new and repeat female borrowers trained annually on financial literacy.

1d. All new credit officers of Kashf Foundation given expanded training on gender sensitization and gender equality.

2. Quality of 2a. Loans disbursed to low cost education of schools private supported by Kashf Foundation improved

Key Activities with Milestones Outputs 1–2 1. ADB executes loan agreement with Kashf Foundation by Q2 2019 2. ADB funds fully disbursed and deployed by Q2 2022 Inputs ADB: up to $15 million loan Other lenders: up to $10 million (B loan) Assumptions for Partner Financing Not Applicable

10 Appendix 1

ADB = Asian Development Bank, FY = fiscal year, Q = quarter. Note: The fiscal year (FY) of Kashf Foundation and of the Government of Pakistan ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2018 ends on 30 June 2018. a Government of Pakistan; Ministry of Planning, Development and Reform; Planning Commission. 2014. Pakistan 2025: One Nation - One Vision. Islamabad. b State Bank of Pakistan, Microfinance Department. 2011. Strategic Framework for Sustainable Microfinance in Pakistan. Karachi. Source: ADB.

Appendix 2 11

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=52124-001-4

1. Contribution to the ADB Results Framework 2. Country Economic Indicators