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Microfinance
regulations: the way forward
By Ghalib
Nishtar
Financial inclusion is a common objective of
many central banks across the world and is pursued through development of
appropriate policies and regulations. These policies and regulations need
to evolve from time to time, in response to changes in the environment and
marketplace.
Pakistan too follows a financial inclusion programme
that strives to provide financial services to a larger portion of the
population, and to integrate the lower income class within the mainstream
financial system. This requires a focus on innovation and change that
facilitates access of financial services to the entire population,
irrespective of their economic thresholds. Regulators often face problems
when regulating and promoting institutions that cater to low income
households, such as microfinance institutions. Such institutions do not
always have the scope to meet the global regulations designed for larger
banks. Yet they need to be regulated in such a manner, so that the safety
of financial systems is ensured.
Pakistan has been a late starter in terms of
recognising the power of microfinance. It decided to embark upon the path
of commercial microfinance back in the year 2000. However, this was by no
means a simple endeavour. It required a large investment and sufficient
time to venture into, in order to identify the marketís dynamics. The
outcome of these endeavours has been positive and Pakistanís microfinance
sector has been able to make its mark on the global microfinance landscape
through its increasing number of institutions. The entire approach has
been transparent and the market response has been positive.
Nonetheless, it is now time to review the entire
situation so that we maintain our momentum towards greater financial
inclusion in Pakistan. The evolution of microfinance was gradual and the
objective was re-articulated through the release of the Microfinance
Strategy Document in February 2007, by the State Bank of Pakistan that
focused on five basic themes:
(1) Recognising the structure and achievements of the
microfinance sector, (2) Highlighting the sectorís issues, (3)
Re-visiting the microfinance strategy; its goals and objectives, (4)
Commercialisation of the microfinance industry and (5) Up-scaling through
substantive new initiatives.
In most developing countries, it is not unusual that
financial services are available to a minority of the population. The
reason for concern about the widespread financial ìexclusionî in
developing countries is straightforward; access to a well-functioning
financial system can economically and socially empower individuals. This
allows them to actively contribute to their economic well being. Today,
most developing countries already have a range of financial service
providers with different ownership structures and legal charters,
providing financial services to low-income households in rural areas. With
a view to significantly increase the outreach to the underserved
communities, the vision of inclusive finance needs to be supported by a
sound policy, and legal and regulatory frameworks. Each developing country
should have a continuum of financial institutions that, together offer
appropriate products and service to all segments of the population. This
would be characterised by:
(a) Access at a reasonable cost of a range of financial services,
including savings, insurance, mortgages, pensions, local and international
transfers etc to all households and enterprises, (b) Sound institutions,
guided by appropriate internal management systems, industry performance
standards and performance monitoring by the market, as well as by sound
prudential regulations where required, (c) Financial and institutional
sustainability, as a means of providing access to financial services
overtime.
Over the past year or more the global financial and
industry landscape has changed dramatically. Like other financial
institutes, microfinance sector has also been affected by the global
financial crisis. There maybe country and regional differences in how
microfinance institutes (MFIs) are being impacted by changing market
forces but in general, whether out of prudence or pressure, MFIs have
significantly slowed their pace of growth. Particularly in smaller
economies where MFIs are more reliant on funds from international sources,
funding has been identified as a key risk.
Despite the severity of these challenges, MFIs have
shown sufficient capacity to endure the financial crisis. Public
investors, multilateral and bilateral institutions, as well as global
microfinance networks, have stepped in and are providing new financing
facilities to help maintain a degree of stability and confidence in the
sector. The management within the institutions is going back to the
fundamentals; tightening credit policies and procedures, diversifying
funding sources etc. Network leaders and investors are pushing for higher
governance standards, improved transparency and better risk management.
Finally, the sector is beginning to experience some consolidation and MFI
mergers, with diversified ownership structures are emerging.
In terms of Pakistan, stability in terms of policy and
market based interest rates will be critical for this sector’s
sustainability and to retain the private sector’s interest. In order to
meet its targets, the sector would require provision of a stable source of
funding for liquidity purpose, as pure commercial funding may not be able
to keep up with the targeted pace of growth. Finally, development of
appropriate mechanisms is required for promoting linkages with the safety
net programs.
-- (The article was presented at the 3rd International
Microfinance Country Forum 2009.)
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