PAKISTAN MICROFINANCE REVIEW Annual Assessment of the Microfinance Industry 2013 FINANCIAL SERVICES FOR ALL Produced by: Pakistan Microfinance Network Art Direction: Sumaira Sagheer Design & Layout: Uzma Toor Photocredits: Retroactive Studios Library Printed at: Pangraphics © 2014 Pakistan Microfinance Network PAKISTAN MICROFINANCE REVIEW Annual Assessment of the Microfinance Industry FINANCIAL SERVICES FOR ALL EDITORIAL BOARD Mr. Ghalib Nishtar Chairperson Editorial Board President, Khushali Bank Mr. Syed Samar Hasnain Director, Agriculture Credit and Microfinance Department, State Bank of Pakistan Mr. Blain Stephens COO and Director of Analysis Microfinance Information eXchange, Inc. (MIX) Mr. Raza Khan Statistics & Results Adviser, Results & Evaluation Team- Economic Growth Group, Department for International Development (UK) Mr. Yasir Ashfaq Group Head, Financial Services Group, Pakistan Poverty Alleviation Fund Mr. Abrar Mir EVP and Group Head, Digital Money & Mobile Payments, United Bank Limited (UBL) Mr. Masood Safdar Gill Director Program, Urban Poverty Alleviation Program, National Rural Support Programme PMN TEAM Aban Haq Advisor Ali Basharat Author and Managing Editor Ammar Arshad Author and Data Compilation Zahra Khalid Author Aimen Shahid Author ACRONYMS AND ABBREVIATIONS AC & MFD Agriculture and Microfinance MFI Microfinance Institution Division MIS Management Information System ADB Asian Development Bank MO Micro-Options AMRDO Al-Mehran Rural Development NADRA National Database and Registration Organization Authority BPS Basis Points NGO Non-Governmental Organization CAR Capital Adequacy Ratio NFLP National Financial Literacy Program CIB Credit Information Bureau NMFB Network Microfinance Bank Limited CGAP Consultative Group to Assist the Poor NPLs Non-Performing Loans CNIC Computerized National Identity Card NRDP National Rural Development Program CPP Client Protection Principles NRSP National Rural Support Programme CPI Consumer Price Index OPD Organization for Participatory CPC Consumer Protection Code Development DFID Department for International OSS Operational Self Sifficiency Development, UK PAR Portfolio at Risk DPF Depositor’s Protection Fund PBA Pakistan Banks Association ECA Eastern and Central Europe PKR Pakistan Rupee EUR Euro PMN Pakistan Microfinance Network FIP Financial Inclusion Program PPAF Pakistan Poverty Alleviation Fund FMFB The First Microfinance Bank Ltd. PRISM Programme for Increasing Sustainable FSS Financial Self Sufficiency Microfinance FY Financial Year PRSP Punjab Rural Support Program GBP Great Britain Pound PTA Pakistan Telecom Authority GDP Gross Domestic Product ROA Return on Assets GLP Gross Loan Portfolio ROE Return on Equity GNI Gross National Income RSP Rural Support Programme GoP Government of Pakistan SBI Shore Bank International IAFSF Improving Access to Financial Services SBP State Bank of Pakistan Support Fund SC The Smart Campaign IFAD International Fund for Agricultural SDS SAATH Development Society Development SECP Securities and Exchange Commission of IFC International Finance Corporation Pakistan JIWS Jinnah Welfare Society SPTF Social Performance Task Force KBL Khushhali Bank Ltd. SME Small and Medium Enterprise KF Kashf Foundation SRSO Sindh Rural Support Organization KIBOR Karachi Inter-Bank Offering Rate SRDO Shadab Rural Development Organization KMFBL Kashf Microfinance Bank Ltd. SVDP Soon Valley Development Program KP Khyber Pakhtunkhwa TMFB Tameer Microfinance Bank Ltd MCGF Microfinance Credit Guarantee Facility UBL United Bank Limited MCR Minimum Capital Requirement USD United Sate Dollar MENA Middle East and North Africa USSPM Universal Standards for Social MFB Microfinance Bank Performance Management MFCG Microfinance Consultative Group VDO Village Development Organization MF-CIB Microfinance Credit Information Bureau WPI Wholesale Price Index MFP Microfinance Providers HIGHLIGHTS YEAR 2009 2010 2011 2012 2013 Active Borrowers (in millions) 1.4 1.6 1.7 2. 0 2.4 Gross Loan Portfolio (PKR billions) 16.8 PKR 20.2 PKR 24.8 PKR 33.1 PKR 46.6 Active Women Borrowers (in millions) 0.6 0.8 0.9 1.3 1.4 Branches 1,221 1,405 1,550 1,460 1,606 Total Staff 11,557 12,005 14,202 14,648 17,456 Total Assets (PKR billions) 30.4 35.8 48.6 61.9 81.5 Deposits (PKR billions) 7.2 10.1 13.9 20.8 32.9 Total Debt (PKR billions) 23.2 27.5 38.3 24.9 26.9 Total Revenue (PKR billions) 6.4 7.5 10.1 12.5 17.3 OSS (percentage) 104.6 99.7 108.4 109.5 118.1 FSS (percentage) 86.8 81.7 100.5 107.5 116.5 PAR > 30 (percentage) 3.4 4.1 3.2 3.7 2.5 CONTENTS SECTION 1: THE YEAR IN REVIEW 1.1. Macro-economy and the Microfinance Industry .........................10 1.2. Policy and Regulatory Environment ....................................12 1.3. Microfinance Industry Initiatives ......................................14 1.4. Conclusion ...........................................................20 SECTION 2: INDUSTRY PERFORMANCE 2.1. Industry Overview ...................................................25 2.2. Scale and Outreach ...................................................26 2.3. Financial Structure ...................................................34 2.4. Funding Profile .......................................................36 2.5. Profitability and Sustainability ........................................37 2.6. Efficiency and Productivity ...........................................40 2.7. Risk Analysis .........................................................42 2.8. Conclusion ...........................................................43 SECTION 3: THE WAY FORWARD 3.1. Challenges ...........................................................46 3.2. Opportunities ........................................................50 ANNEXURES Annexure A-1: Performance Indicators-Industry Aggregate (2007-2011) ....56 Annexure A-2: Performance Indicators-Individual Institutions and Peer Groups (2012) ....................................64 Annexure B: Regional Benchmarks 2010 .................................94 Annexure C: Sources of Data 2012 ......................................96 Annexure D: Adjustments to Financial Data ..............................106 Annexure E: Terms and Definitions .....................................108 SECTION 1 The Year in Review SECTION 1 THE YEAR IN REVIEW In the year 2013, microfinance industry in Pakistan witnessed another year of continued growth and expansion. The industry posted consistent increase in not only credit outreach and gross loan portfolio but also in micro-savings. Growth in Pakistan’s economy remained modest due to persistent energy shortages and security challenges. Some macroeconomic indicators turned relatively favorable such as inflation, which eased up to remain in single digits. Importantly, the year saw a smooth political transition in the country with one elected government transferring power to another. This not only kept the economy in general and the microfinance industry in particular safe from adverse A very important effects that could have resulted from a problematic political transition, but also buoyed investor highlight of the confidence in the country. year was the On the regulatory side micro-insurance regulations were launched by the Securities and Exchange Commission of Pakistan (SECP) in an effort to provide a framework for micro-insurance emergence of operations in Pakistan but also promote further development of this sector. leading MFPs Investors continued to show interest in the microfinance industry in Pakistan, leading to which can now another acquisition of a microfinance bank (MFB) by an international entity and importantly be clearly distin- placement of funds in an MFP by an international lender. MF-CIB -a key development for microfinance in the country - was rolled out nationally and opened for enquiries. A number of guished among new responsible finance initiatives were launched including Transparent Pricing Initiative in their peers. collaboration with Microfinance Transparency. A very important highlight of the year was the emergence of leading MFPs which can now be clearly distinguished among their peers. These MFPs can be distinguished by their market share, financial strength, profitability, experience curve and mature business models. MACRO-ECONOMY AND MICROFINANCE INDUSTRY Pakistan’s economy grew by 3.6 percent in 2013 as compared to 4.4 percent in the previous financial year. The economic outcome was below the target of 4.0 percent for the year. Although industrial sector showed recovery but it could not compensate for slower growth in the services and agriculture sector1. Despite the modest growth in the economy the microfinance industry in Pakistan grew by 20 percent in terms of outreach while GLP grew by 36 percent to close at PKR 52 billion2. This relationship is consistent with findings of a study conducted in 2008 which showed that GDP growth rate does not have any relation with the performance of microfinance providers. MFPs can perform well in terms of profitability, operational self-sufficiency and portfolio quality even in economic downturns and periods of slow economic growth.3 The investment rate, which has been already low in Pakistan, declined further in 2013. The investment to GDP ratio declined to 14.2 percent from 14.4 percent in the previous year as shown in the Exhibit 1.14. Persistent macro imbalances, structural bottleneck in the energy sector, and an uncertain security environment continue to impede investment. On the contrary microfinance industry continued to attract foreign investment