Pak Tacr Vol5

Technical Assistance Consultants Final Report
Project Number: TA 4894 November 2009
Islamic Republic of Pakistan: Improving Access to Financial Services Credit Information Bureau
(Financed by the Asian Development Bank)
Prepared by FINCON Services Inc.
For Ministry of Finance & State Bank of Pakistan
This consultants 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 projects design.
Improving Access to Financial Services in Pakistan
Final Report
Credit Information Bureau

(VOLUME V) STATE BANK OF PAKISTAN MINISTRY OF FINANCE TA No. 4894-ADB
Submitted by: Fincon Services Inc. Canada
November 2009
Table of Contents
ACKNOWLEDGEMENTS AND ABBREVIATIONS EXECUTIVE SUMMARY SECTION I: BACKGROUND. A. Introduction . A.1. Rationale for the Project. A.2. Historical Context. B. The Benefits of a CIB covering Microfinance SECTION II: THE CURRENT ENVIRONMENT. A. The eCIB at State Bank of Pakistan.. A.1. the eCIB Data Base and Report Framework B. Private Sector Credit Bureaus C. Demand for Micro Credits D. Growing Competition in the Sector E. Supportive Factors for an MFCIB . E.1. Consensus Regarding the Need for an MFCIB . E.2. Conditions Favoring a CIB for MFIs.. F. Obstacles to an MFCIB F.1. The Legal Stumbling Block.. F.2. the Social Imperative F.3. MFI Reluctance.. F.4. the Question of Timing F.5. the Quality of Credit information . F.6. Other Possible Risks SECTION III: THE LEGAL AND REGULATORY ENVIRONMENT IN PAKISTAN . A. Government Policy. B. Recommended Revisions to the Legal and Regulatory Framework. C. The Draft Credit Information Act. SECTION IV: PROSPECTS FOR A CIB FOR MICROFINANCE. A. Whither the Microfinance Market?. A.1. Trends in the MF Market. B. Donors and Funding C. Deposits and Funding. D. The Role of Islamic Finance and M-Banking . E. The Role of SBP in an MFCIB.. E.1. the Majority View E.2. the Minority View 1 4 4 5 6 11 14 14 15 20 23 25 28 28 35 39 39 42 45 46 47 49 52 52 53 55 62 62 63 64 66 69 74 74 75
E.3. Best Practice F. The Options for a New MFCIB G. Financial Projections.. H. The Lahore Pilot Project SECTION V: CONCLUSIONS, RECOMMENDATIONS AND NEXT STEPS A. Conclusions.. B. Recommendations.. C. Next Steps ANNEX A: ANNEX B: ANNEX C: ANNEX D: Persons Interviewed Basic Principles of a CIB: Bibliography Profit and Loss Scenarios for MFCIB
76 79 82 86 91 91 93 98 102 104 105
BOXES, TABLES, CHARTS AND GRAPHS Table 1: The Microfinance Sector in Pakistan.. 9 Table 2: Microfinance Providers. 11 Table 3: The Beneficial Effects of Introducing an MFCIB in Pakistan 13 Table 4: Active Borrowers in the eCIB Data Base. Table 5: Inquiries to the eCIB Regarding Consumer and Corporate Borrowers Table 6: Stakeholder Matrix Table 7: Unsolicited Statements in Support of an MFCIB. Table 8: Is There a Need for an MFCIB? .. Table 9: Obstacles to a Credit Information Bureau. Table 10: Financial Self-Sufficiency.. Table 11: Comments on the Draft Credit Bureaus Act 2007.. Table 12: Volume of Savings by PMN Members Table 13: Funding Structure of MFBs Table 14: SWOT Analysis for MFCIB Table 15: Options for a Microfinance Credit Information Bureau. Table 16: Should Membership in an MFCIB be voluntary or Mandatory? 86 16 17 30 36 38 40 43 56 65 67 80 81
Table 17: Sample of MFIs Participating in PMNs Pilot Project.
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ACKNOWLEDGEMENTS AND ABBREVIATIONS

The consultant would like to express his appreciation for the administrative and research support he received from the Team Leader of the project, Mr. Tahir Ali Shah, and his staff who provided both a professional and friendly atmosphere. The Ministry of Finance provided office space, while State Bank of Pakistan provided much useful context, documentation, and data. At SBP I wish to thank Qasim Nawaz, Zulfikar A. Khokhar, and Syed Ali Jafar Abidi for their cooperation. Syed Mohsin Ahmed and Moazzam Iqbal at Pakistan Microfinance Network were most helpful in providing data and advice on the growing microfinance sector. Ammar Valika of Sidat Hyder Morshed provided a wealth of contacts and astute criticism of earlier drafts. All those interviewed, from senior government officials to microfinance lenders, were candid and helpful in expressing views and preferences. ADB CBR CGAP DAMEN DFID eCIB FMFB FSSP GIS GOP IFC IFI MFB MFCIB MFI MFP MIS MOF NADRA NGO NIC NRSP PAR PCR PKR PMN PPAF PRSP RSP SBP SECP USAID Asian Development Bank Central Board of Revenue Consultative Group to Assist the Poor Development Action for Mobilization and Emancipation U.K. Department for International Development Electronic Credit Information Bureau (within SBP) The First Microfinance Bank Ltd. Financial Sector Strengthening Program Geographic information system Government of Pakistan International Finance Corporation Islamic Financial Institution Microfinance bank Microfinance credit information bureau Microfinance institution Microfinance provider Management information system Ministry of Finance National Database and Registration Authority Non-government organization National identity card National Rural Support Program Portfolio-at-risk Public credit registry Pakistani rupee Pakistan Microfinance Network Pakistan Poverty Alleviation Fund Punjab Rural Support Program Rural support program State Bank of Pakistan Securities and Exchange Commission of Pakistan U.S. Agency for International Development
ADB TA 4894-PAK: Improving Access to Financial Services
EXECUTIVE SUMMARY
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. 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 missinga credit information bureau covering the microfinance sector. 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 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 Pakistans program to extend access to financial services throughout the country so that poverty levels can be reduced. 5. There are many factors supporting the creation of an MFCIB. They include: 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.
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The regulatory and legal regimes, which are usually serious roadblocks to a CIB, are generally favorable in Pakistan.
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. 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. 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. 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 deepening and broadening of the MFCIB data base. The growth of Islamic financial products will also help bring the unbanked into the formal system. 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 SBPs active participation because the eCIBs 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. 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
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oversight, to make regulations on data collection and dissemination, and to ensure consumer privacy and protection. 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. 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. 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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SECTION I. BACKGROUND
A. Introduction The microfinance sector in Pakistan has grown rapidly in recent years, from just 60,000 active borrowers in 1999 to and estimated 1.5 million in the end of 2007. Pakistan Microfinance Network (PMN), a non-profit association of nineteen microfinance providers (MFPs) that covers 95% of the MF market, estimates that outreach in the sector will grow to three million by 2010 with an upside potential in the long run of 15-20 million. The growth has been facilitated by several factors, mainly a government that is actively pursuing the expansion of financial services into untapped urban and rural areas through appropriate regulatory and institutional means, and the proliferation of microfinance providers able and willing to reach into the poorer areas with funds provided by international donors. 1 With the growth on both the demand and supply side (more borrowers and more funds to lend) and with the new MF lending institutions in place (the recently established microfinance banks), there remains only one important piece of the financial infrastructure missinga credit information bureau (CIB) covering the microfinance sector. A CIB acts as an intermediary between lenders and borrowers and brings many benefits to both creditor and debtor, helping to create a creditconscious culture while reducing the number of delinquencies on loans and facilitating healthier bank balance sheets. An international credit information system specialist from Fincon Services Inc. via Bank world Inc. was tasked with the following responsibilities. 1. To assess the potential for the establishment of a credit information bureau for all types of institutions, including Microfinance Banks, Rural Support Programs, and other Non-Government Organizations to support improved access to financial services and lower cost services through improved information systems, reporting and transparency; 2. To conduct a feasibility study in cooperation with the Pakistan Microfinance Network for establishment of credit bureau; and 3. To present the results of the feasibility study and recommendations in a workshop for relevant stakeholders. From September 2007 through April 2008, the consultant spent four months in Pakistan, primarily in Islamabad but also in Karachi and Lahore, where he met and interviewed 69 people at 35 different government and private institutions, often more
For more detail on the rapid growth of the MF sector in Pakistan, see Pakistan Microfinance Network and Shore Bank International Ltd., Microfinance Performance in Pakistan, 1999-2005, Islamabad, 2006.
1
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than once, to ascertain the prospects for a credit information bureau that would serve the microfinance sector. Aside from multiple meetings with State Bank and PMN, the consultant visited, among others, three donors, five NGOs, three RSPs, four commercial banks, six microfinance banks, and four credit information bureaus. Although CIBs exist for the regulated banking system covering both consumers and corporations, there is no CIB that reaches into the poorer urban and rural areas to capture borrower debt and repayment data. Such a microfinance-dedicated CIB would be a vital ingredient in the Government of Pakistans program to extend access to financial services throughout the country so that poverty levels can be reduced. A.1 Rationale for the Project The Asian Development Bank, the multilateral lending institution that is funding this project, offered a clear rationale in its Report and Recommendation of the President to the Board of Directors regarding the loans and TA to Pakistan (excerpts here) 2:
24. Lack of reliable business information and credit history has been a major impediment to the growth of financing for the poor and for microenterprises....SBP and the Pakistan Microfinance Network recognize the need for a credit information bureau for all types of institutions (regulated and unregulated), including microfinance banks, rural support programs (RSPs), and other NGOs....Broader credit information coverage is especially important in rural areas where RSPs and NGOs are key providers of financial services....This will be increasingly important as commercial lenders expand their targeting of the microfinance market. An expanded credit reporting system can also promote competition among lenders, and provide good customers with alternative sources of finance. ....Based upon a PMN competition survey conducted in Lahore in 2006, PMN officials state that the demand is high for such credit information service in the expanding and competitive Lahore market. A feasibility study to determine the potential design, operations, and initial capital required is needed to pilot an expanded CIB covering regulated and unregulated institutions.
The ADB goes on to applaud Pakistans achieving economic growth rates averaging over 7.5% a year for the three years to 2006. However, more needs to be done to alleviate poverty 3.
Twenty-four percent of the population, or 36 million people, still live below the poverty line. Inclusiveness and/or the sustainability of this growth require more reforms backed by specific actions targeting those left behind....Access to credit and other financial services can be made much easier, more transparent, cost effective, and efficient. This is the essence of the proposed program.
2
Asian Development Bank, Proposed Loans and Technical Assistance Grants, Islamic Republic of Pakistan: Improving Access to Financial Services (Phase 1) Program, Project No. 39492, November 2006. 3 Ibid., pp. i-ii.
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Before proceeding, a clarification is in order. The task for this CIB project was worded in two slightly different versions, which produced some ambiguity. Version 1: To determine the feasibility of a private CIB covering both regulated and unregulated lenders, including microfinance institutions, non-government organizations, microfinance banks, and rural support programs. This language implies the need to determine the potential for creating an independent private sector-owned CIB that would cover all creditors, including those not currently regulated, such as RSPs and other NGOs, which means assessing the feasibility of a new and broader CIB that could replace existing CIBs or merge with them. (emphasis added) Version 2: To expand Credit Information Bureau (CIB) coverage to include the microfinance sector and develop a Credit Information Bureau for all types of financial service providers. (emphasis added.) The language in this version implies either the widening of current eCIB coverage at State Bank of Pakistan into the MF sector, or creating a new and different CIB for all types of creditors, and it could be either publicly or privately owned. One infers from the differing versions that we should look at several options: 1. Expanding the existing eCIB at SBP to cover the microfinance sector 2. A merger of existing private credit bureaus, such as Data Check or NEWSVIS, or their individual expansion into the MF sector 3. Creating a new private CIB just for the MF sector, one supported by the PMN and its members including existing microfinance banks (MFBs). Following extensive onsite research and interviews between September 2007 and February 2008, these three options plus two others emerged as possible avenues of approach. A.2 Historical Context The subject of a credit information bureau has been in the public forum in Pakistan for at least four years. Microfinance institutions, the State Bank of Pakistan, as well as regulated and unregulated financial institutions and private associations, including existing credit bureaus and the Pakistan Microfinance Network (PMN), have debated the need for another CIB and even commissioned studies from international consultants and donors. Government policy statements and presentations about the financial sector invariably include a reaffirmation of the need to create a credit screening institution that will facilitate the broadening of finance to the rural and urban poor. At least two prior studies on the subject were conducted in recent years. The first was written by Bolivian consultants InfoCred and Fin Rural in late 2004. The brief report was long on the macroeconomic picture in Pakistan and short on analysis of the feasibility of a new CIB. Its coverage of the legal environment in Pakistan,
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supply and demand factors, initial and operational costs, and data availability was incomplete. The second report was funded by the World Bank Group at about the same time and written by a respected Pakistani consulting firm, Sidat Hyder Morshed Associates (Pvt.) Ltd for the State Bank. This study covered such topics as the existing information infrastructure at eCIB, the methodology for developing software for CIBs, and CIBs in other countries, such as those in the UK, Singapore, Malaysia and New Zealand. Before, during and after these studies, the Government of Pakistan (GOP) was moving rapidly along a number of MF-related policy fronts. Among these steps taken to further development of the microfinance sector and to provide the right facilitative environment for initiatives in this area were the following 4: 1. The launch of the Microfinance Sector Development Program implemented by the GOP through the Ministry of Finance with assistance from the Asian Development Bank 2. The establishment by Presidential Ordinance in 2000 of the countrys first microfinance bank (MFB), Khushhali Bank (KB) 3. The establishment in 1999 by the GOP of an apex institutionthe Pakistan Poverty Alleviation Fund (PPAF)to ensure availability of funds on a continuous basis to NGOs 4. The enactment of an exclusive regulatory framework for microfinancethe Microfinance Institutions Ordinance, 2001. 5. The creation of First Microfinance Bank from the assets of the Agha Khan Rural Support Program 6. The recognition by the GOP, at the prompting of PMN, that microfinance can be a mechanism to deepen financial sector penetration rather than solely a tool aimed at poverty alleviation 7. The Government has made microfinance a key theme under its Medium-Term Development Framework (MTDF) 2005 2010 Several private sector CIBs have entered the market for consumer loans, and the State Bank has its own eCIB covering the regulated financial sector. The eCIBs reporting, operational and IT systems have been revamped in recent years and significantly upgraded in the light of best international practices. The scope and administration of the eCIB database has been further enhanced by upgrading communication infrastructure, hardware and software, thereby improving the overall operational efficiency of eCIB. However, despite official exhortations, studies and new MF policies, there has been little or no movement on the MFCIB front. The primary reason appears that no entity, government or private, was quite convinced the market conditions were right and no one wanted to expend time and money prematurely. Now with demand for micro4
Syed Mohsin Ahmed and Mehr Shah, Amendments to the Microfinance Institutions Ordinance, 2001: Implications for the Sector, Essays on Regulation and Supervision, October 2007, pp. 3-5.
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credits rising rapidly and microfinance providers (MFPs) competing vigorously for clients, the timing appears right. This present feasibility study for microfinance CIB was commissioned to be the last of its kind. It assesses the MF market, offers alternative approaches for establishment, and provides a road map if such an entity appears feasible and sustainable over time. There are only 5 million borrowers in all of Pakistan out of 160 million people, so the country is under-banked and underserved. About 70% of the Pakistani economy is outside the formal banking system, so there is a vast potential for broadening access to finance, and an MFCIB is an important means toward that end. Pakistan is lagging many other countries in getting financial access to the poor. One measure is the MFI participation rate, which measures how much of the population MFIs reach as a percentage of the total population. In Pakistan today the rate is less than one percent, while in Bangladesh the rate was 13.1% in 2003 5. Nineteen other countries, including Indonesia, Sri Lanka and Nepal, had participation rates higher in 2003 than Pakistans rate today. Healthier MFI balance sheets plus greater use of an MFCIB plus the growth of m-banking will all help to raise Pakistans participation rate. Table 1 shows the growth and status of the MF sector in Pakistan. The first significant statistic that emerges is the rapid growth rate of the number of active borrowers in recent years. New entrants help explain the current high level of interest among providers, although admittedly the numbers start from a low base. Still, the sector is experiencing an expansion that most participants forecast will continue. The validity of that assumption really lies at the base of this study. A continued strong demand for credits from the rural and urban poor will set in motion competitive pressures among MFPs and policy pressures at SBP to facilitate the process so that the goal of poverty alleviation has a better chance to succeed. To put this in context, current poverty reduction goals have not been achieved despite economic growth exceeding 7% per annum on average this century. According to PMN, the microfinance industrys network coordinator, capacity builder and spokesman, there are about 1.5 million active borrowers in the MF sector today with at least three million forecasts for the end of 2010. Beyond that, there is a potential for 25-30 million, according to the State Bank. MFPs interviewed were in agreement that the rural and urban poor have no propensity to default on their loan payments. MF clients do not intentionally cheat or evidence an unwillingness to pay. Poor people are simple and honest, they said, and want to repay their loans, even when there are illnesses or deaths in the family. Moreover, they dont default because they are afraid of the police and concerned about their reputations. They dont want to shame their ancestors and their good
Patrick Honohan, Financial Sector Policy and the Poor, World Bank Working Paper No. 43, Washington, DC 2004, page 4.
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name. More positively, the poor repay because they see the loan as a window of opportunity they do not want to lose. MFP officials say the basis for bad loans is circumstantial, not intentional. They cite the following types of events that cause missed payments: bad weather when travel and communication are not possible an indifferent or unknowledgeable client illnesses, funerals, weddings and eid holidays and other personal reasons misbehavior on the part of MFP staff loan made to a woman but used by her husband fraud where the reason for the loan is misstated when an activist or group leader abuses or cheats the borrower If the above is true, then there seems little need for a credit bureau for microfinance, especially as the loan sizes are small (averaging perhaps $200) and credit risk is minimal. Yet the data show there are bad loans in the sector. The MFPs have writeoffs as high as three percent of their gross loan portfolios. Table 1 shows that their portfolio at risk >30 days is around 2.5%? 6 Table 1:
The Microfinance Sector in Pakistan*

No. Active Borrowers** Growth in Active Borrowers (%) Total Assets of MF sector (USD millions) Gross Loan Portfolio (USD millions) Write-offs / GLP (%) PAR (>30 days) / GLP (%) PAR (>90 days) / GLP (%) Pakistans GDP (USD billions) Total MF GLP / GDP (%) 2003 332,548 224 140.6 47.1 3.1 13.0 8.8 83.5 0.056 2004 451,324 35 160.8 66.5 3.2 9.3 7.6 98.1 0.068 2005 612,744 36 223.6 95.1 3.0 3.3 2.0 109.6 0.087 2006 835,460 36 288.6 176.8 3.1 2.3 1.3 127 0.14 2007e 1,450,000 74 366.5 246.0 3.2 2.4 1.3 143.8 0.17 2008f 2,138,750 48 465.5 372.0 3.2 2.5 1.4 151.0 0.25
Sources: PMN for historical data, The Performance Indicator Report based on audited accounts of MFPs. Fincon for most of 2007 and 2008 data.
Two reasons seem to account for this seeming anomaly. One is that the data collected by nonregulated MFIs are not as accurate and unambiguous as the data in the formal banking sector. The other is that the ratios just quoted are from the PMN data base that comprises only their 20 members, although these members do comprise 96% of microfinance lending.
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* Data refer to the portfolios of the 20 MFPs that are members of PMN (including NGOs, RSPs and MFBs). Since half these MFPs use the calendar year as their fiscal year and the other half use June, the aggregated data are not precise. ** Active borrowers are defined as the number of people with loans outstanding at the moment; however, some MFPs use the term active borrower to mean the number of loans outstanding which may be more than one per person. State Banks classification is that if a borrower has taken credit lines from more than one financial institution, it counts as one borrower. As the new NIC becomes more widespread and MFPs agree on common definitions, this likely double counting should diminish. Write-offs = Loans not repaid at all (practice varies as to when the loss is actually booked). Some MFPs call these bad loans, again an instance of diverse terminology in use. GDP = Gross domestic product (the total market value of all final goods and services produced in Pakistan within the calendar year). PAR = Portfolio at risk = value of loans outstanding at a point in time, the same as nonperforming loans or loans due past 30 days. Loans that are up to 30 days late are not commonly deemed non-performing.
_____________________________________________ Another interesting point to note in Table 1 is the skewed nature of the MFPs assets on their balance sheets. In normal circumstances, a lenders assets consist mostly of loans (70-80%), but only Kashf Foundation is within this range (76%). For the other MFPs, loans range from only 33.5% of assets in 2003 to 67.1% in 2007. The trend is satisfactory, but one wonders why MFP management chose/chooses to keep a large share of their assets in cash, government securities and deposits in other FIs. Is it political uncertainty, tax issues, or risk aversion? The next table, Microfinance Providers, lists MFPs by category. Some are large and influential (NRSP, Kashf Foundation) and some are small (Sarhad RSP and Taraqee Foundation). Some are regulated by SBP (all the MFBs) and some are not (all the NGOs and RSPs). The eleven MFPs that are highlighted are participating in the PMN-sponsored pilot project in Lahore. (See Section IV H.)
Table 2: Microfinance Providers (MFPs)

RSPs National RSP Punjab RSP Sarhad RSP Thardeep Rural Development Program MFBs Khushhali Bank First Micro Finance Bank Rozgar Microfinance Bank Network Microfinance Bank Tameer Microfinance Multi-sectoral NGOs DAMEN Sungi Development Fdn. Taraqee Foundation Commercial FIs Bank of Khyber Orix Leasing First Womens Bank SME Bank Specialized MFIs Kashf Foundation Asasah Akhuwat SAFWCO
Orangi Pilot Project
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ADB TA 4894-PAK: Improving Access to Financial Services Bank Pak-Oman MFB
Community Support Concern
B. The Benefits of a CIB Covering Microfinance Experience in many countries confirms conclusively that there are multiple benefits to having CIB intermediate transactions in the financial sector. Pakistan would not have five CIBs already if that were not true. Microfinance is the one sector not fully or appropriately covered yet in Pakistan. The benefits of extending coverage to this sector are extensive. An MFCIB will: 1. 2. 3. 4. 5. 6. 7. 8. Screen clients more effectively 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 Lower default and delinquency rates Reduce the instances of over-borrowing from multiple lenders Reduce instances of fraud Strengthen the credit culture on both sides: teaching lenders how to assess credit risk and rewarding good borrowers by reducing access to finance for bad borrowers 9. Open up alternative sources of finance for good borrowers 10. Clarify market patterns and needs, thereby permitting better MF products 11. Promote competition among MFPs, which will help reduce lending rates and extend the maturities of loans 12. Permit more efficient management of credit risk by lenders 13. Extend outreach of credit for low income families 14. Reduce verification costs 15. Keep PAR close to zero 16. Mitigate poverty by expanding access to finance to women and to the entrepreneurial base of the rural areas 17. Increase the share of private credit in GDP, which is comparatively low in Pakistan Introducing an MFCIB will not produce all these benefits in a short period of time, nor will it be a quick fix for the problems shown in Table 1, but over time an MFCIB will help increase transparency, remove a degree of uncertainty among MFPs, and provide the basis for improved assessment of credit risk. Table 3 illustrates this impact. The key point to keep in mind is that when credit histories of borrowers remain secret and unshared among lenders, the result is that (a) lenders are not aware of a new clients past repayment record or his current debt outstanding, and (b) borrowers take advantage of the gap in information and procure multiple loans from different creditors, which adds to their indebtedness and reduces their creditworthiness. Extending CIB coverage to the MF sector will curtail these risks and reduce the practice whereby individuals take new loans to pay off old loans without lenders knowing.
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If MFIs pooled their borrower data in an independent third-party information provider like an MFCIB, the costs of assessing borrower creditworthiness will drop since time will be saved in identifying good and bad borrowers. In a virtuous circle, risk premiums can then drop and more business can be attracted. From a broader perspective, an MFCIB will encourage competition among lenders, reduce the cost of borrowing for good customers, enhance the compliance culture, and promote greater economic activity among the vast majority of Pakistans population. Table 3 looks at the benefits of an MFCIB from a different angle by asking the question, how will it ameliorate current conditions in Pakistan? In a market economy, the effects are all positive.
Table 3: The Beneficial Effects of Introducing an MFCIB in Pakistan

Current Conditions in MF Sector
Moderately high level of delinquent loans
Effect of Introducing an MFCIB

Will promote honoring of obligations, penalize defaulters, reduce number of bad loans, increase profitability of MFPs and generate more internal capital Will speed up financial services delivery and reduce borrowers costs by reducing middlemen, both of which will build public and MFP confidence Will encourage banks and MFIs to upgrade IT in order to have access to MFCIBs data base Will promote better credit culture and reduce access to funding for the non-transparent Will promote greater understanding, new loan products and more public confidence Will increase the amount of borrower data available so that creditors can make more informed decisions based on individual repayment history. MFCIB data collation will uncover data gaps, misinformation and fraud
Low outreach, large untapped market
Most MFPs have inadequate IT infrastructure Poor governance practices in the sector Inexperience of rural and urban poor with regard to financial institutions Lack of reliable and timely financial information about borrowers; hence, heavy reliance on group lending and social pressure to repay Poor data quality at borrower level (errors, gaps) which is transmitted to MF lenders High borrowing rates plus presence of wholesalers with high commissions
With more competition for good borrowers and more information on all borrowers, rates should decline With less credit risk to worry about and more confidence in lending decisions, MFPs can diversify product lines, e.g., credit cards,
Few loan products to attract clients; lack of term funding sources
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mortgages Insufficient IT infrastructure Will encourage banks and MFIs to upgrade IT in order to have access to the CIBs data base Better trained staff will discriminate more carefully among potential debtor/clients and price risk accordingly
MFP staff untrained in risk management
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SECTION II. THE CURRENT ENVIRONMENT

A. The eCIB at State Bank of Pakistan Pakistan has one public sector credit bureau housed at the central bank and four credit bureaus in the private sector. They serve different markets under different regulatory regimes and are at various stages of achieving profitability. They all claim to have a unique niche in the market and all appeared, when asked, to be willing to talk with any new CIB for microfinance to explore avenues of cooperation. Pakistans first credit information bureau (CIB) was established at State Bank in 1992. The key principle of reciprocity was adhered to, that is, only those members of the CIB who contribute data to the CIB are eligible to inquire about a particular borrower whose data reside in the CIB data base. The CIB captured data from financial institutions above PKR 0.5 million on corporate borrowers, an amount consistent with SBPs goal of monitoring large loans that could pose a threat to the banking system. Then in April 2003 SBP vastly improved the scope of its CIB by introducing eCIB, becoming the first CIB in the region to have an online facility for its member FIs, enabling them to upload customer data and download customer credit reports. The next step was for eCIB to remove its PKR 0.5 million floor on the size of loans to report and to require all financial institutions, whether regulated by SBP or SECP, to supply information on all their loans. This step occurred In April 2006, greatly enlarging eCIBs data base from 200,000 to 4.6 million borrowers. The eCIBs forecast is for their data base to encompass as many as ten million customers by 2011. The eCIB has the capacity (via Oracle) to expand its data base, so officials say technical issues with regard to gathering and storing the data are not a problem. The SBPs stated purpose for removing the floor was because (a) the central bank wanted to enable the recognition of smaller layers of default, and (b) the banking system had matured and more credit cards and consumer loans were being offered in the market that SBP wanted to capture. From an international perspective, it could be argued that the previous floor for loan reporting, PKR 500,000 or about USD 8,300, is comparable to the floors in many other countries with public credit registries. The country examples shown below have a similar minimum loan size because such a floor (a) keeps data management under control, (b) contributes to the central banks goals of banking supervision and preserving banking system stability, and (c) does not stretch the central banks narrower mandate into the private sector. Indonesia Madagascar Nigeria Romania $7,326 $7,983 $8,830 $6,664
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Spain Turkey
$6,450 $6,371
Moreover, as the World Banks credit bureau specialist Margaret Miller argued in her path-breaking book 7, there are several good reasons for establishing a minimum loan size cutoff in a public credit registry (PCR). If banking supervision is the primary goal of the PCR, then information on small loans is not likely to be of significance. 2. By including all loans, or virtually all loans, the number of records in the registry balloons.The greater amount of data complicates management of the PCR and analysis of the data. 3. Data on small loans are also more likely to include errors, reducing the overall quality of the information in the registry. 4. A minimum loan size for the PCR will provide a clear market niche where private registries can develop. These are compelling reasons and ones that have convinced several central banks to privatize their PCRs, e.g., Azerbaijan, Mongolia. A.1. The eCIB Data Base and Report Framework As Table 4 shows, the number of active borrowers (both consumers and corporations) registered in the eCIB data base has been steadily increasing, although the combined data since May-June 2007 show a peaking and slowing of growth. Regulated financial institutions pay PKR 135,000 to join the eCIB and thereafter 30 rupees per inquiry about a borrowers current credit status. This fee is the lowest cost option in the market. Each inquiry to eCIB normally triggers a credit report that shows if a borrowers outstanding loans are 30, 60 or 90 days overdue. If that is the case, this is the negative data the creditors are seeking in order to determine whether or not to extend further credits. If there are no entries in the columns for overdue loans, then in the eCIBs view that constitutes positive datano defaults, no missed payments, and no NPLs in the record. State Banks eCIB generates credit reports with fresh payment histories of borrowers every month showing a running account of the most recent twelve months. Borrowers who defaulted more than twelve months earlier, whether they cleared their records or not, will show a clean credit history in subsequent reports that eCIB generate. If a borrowers name was on a black list for six straight months, it will then disappear after twelve more months, rendering his credit report current but less than accurate. The record of how much a borrower was overdue in his delinquencies and how many times he paid late or not at all is not shown at eCIB 1.
Margaret J. Miller, ed., Credit Reporting Systems and the International Economy, The MIT Press, Cambridge, Mass., 2003, page 40
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Table 4: Active Borrowers* in eCIB Data Base

DATA AS ON: April 30, 2006 May 31, 2006 June 30, 2006 July 31, 2006 August 31, 2006 September 30, 2006 October 31, 2006 November 30, 2006 December 31, 2006 January 31, 2007 February 28, 2007 March 31, 2007 April 30, 2007 May 31, 2007 June 30, 2007 July 31, 2007 August 31, 2007 September 30, 2007 October 31, 2007 November 30, 2007 December 31, 2007 January 31, 2008 February 29, 2008 CORPORATE CONSUMER BORROWERS BORROWERS 19,367 20,066 21,592 22,086 22,103 23,525 24,286 24,543 25,537 26,333 26,979 27,730 28,636 29,028 29,485 29,775 30,412 30,931 31,409 31,547 32,770 32,450 32,540 2,283,571 2,361,376 2,362,612 1,774,702 2,683,650 2,693,061 2,764,271 2,523,969 2,955,871 2,885,925 3,257,266 3,417,044 3,459,194 3,490,198 3,580,224 3,622,116 3,647,075 3,615,055 3,634,242 3,657,824 3,659,534 3,536,004 3,585,045 TOTAL 2,302,938 2,381,442 2,384,204 1,796,788 2,705,753 2,716,586 2,788,557 2,548,512 2,981,408 2,912,258 3,284,245 3,444,774 3,487,830 3,519,226 3,609,709 3,651,891 3,677,487 3,645,986 3,665,651 3,689,371 3,692,304 3,568,454 3,617,585
Source: State Bank of Pakistan * Active borrowers are those with loans currently outstanding. Hence, the table does not represent the growth of all borrowers past and present but the incremental growth of new and active borrowers as of the date shown. If a borrower has availed various facilities from more than one financial institution, eCIB has counted it as one borrower.
The size of the loans reported to eCIB is interesting in that about one-third of consumer loans are below PKR 30,000 (c. USD 484), which is the ceiling for MF loans to a single individual. Thus, the eCIB is capturing some data on borrowers taking out microfinance loans. Proponents of the eCIBs extending its mandate to cover the whole MF sector can point to this and say eCIB already has a head start, so why invent something new that will take time to reach the level eCIB has already reached. On the corporate side, the percentage of smaller loans is much lower (less than 8%). The existence of these smaller corporate loans can mean either (a) eCIB is capturing some information on small and medium enterprises, or (b) some corporations are taking smaller loans as working capital.
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By gathering debtor payment information, the eCIB is supposed to provide a disincentive for borrowers to default on their loans. But eCIB output provides only current information on whether a borrower has been overdue for a certain period. It does not indicate the number of times he or she has been overdue or how many months (after one year) that these instances occurred. Lenders cannot get a full credit picture of a borrower, and this dilutes the potential of the eCIB as a deterrent and as a credit tool. As long as financial institutions do not receive a complete picture of a borrowers credit history, this asymmetry of information will permit loan defaulters to continue to receive loans as long as they have settled earlier loans. Table 5 below shows the unsteady rise in the total number of inquiries fielded by eCIB each month from banks who are seeking a credit report on their customers. Inquiries appear to have peaked in July and August 2007 and flattened thereafter, perhaps because as bank NPLs began to rise, banks reduced their rate of new loan disbursements.
Table 5: Inquiries to the eCIB Regarding Consumer and Corporate Borrowers

CONSUMER Month Reports 32,635 JUN-06 34,631 JUL-06 38,166 AUG-06 50,896 SEP-06 46,821 OCT-06 82,614 NOV-06 87,060 DEC-06 92,540 JAN-07 108,157 FEB-07 147,076 MAR-07 162,227 APR-07 178,527 MAY-07 194,315 JUN-07 208,489 JUL-07 221,926 AUG-07 195,705 SEP-07 165,481 OCT-07 250,796 NOV-07 168,729 DEC-07 239,562 JAN-08 178,357 FEB-08 211,825 MAR-08 TOTAL 3,096,535 CORPORATE Month Reports 9,158 JUN-06 8,182 JUL-06 8,862 AUG-06 8,578 SEP-06 7,185 OCT-06 9,175 NOV-06 8,794 DEC-06 7,728 JAN-07 9,369 FEB-07 10,343 MAR-07 10,212 APR-07 10,783 MAY-07 11,120 JUN-07 11,020 JUL-07 9,931 AUG-07 9,611 SEP-07 9,369 OCT-07 10,393 NOV-07 8,229 DEC-07 12,198 JAN-08 10,237 FEB-08 11,356 MAR-08 211,833
Source: State Bank of Pakistan. Data collection began in June 2006.
Thus, there are three problems with the eCIB report framework:
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First, the history on each borrower extends only over the most recent twelve months, which does not provide an appropriately lengthy record of borrower behavior. The eCIB is considering extending the history to two years and then three years, which would still be shorter than the records kept at the private CIBs in Pakistan. Second, if the credit report shows no data in the 30/60/90 day past-due columns, SBP states that this amounts to positive data on the borrower, i.e., a good payment record. However, no data in these columns could mean several things that are not distinguished in the report. The person in question could be a) A new borrower with no credit history, or b) A good borrower with a long credit history and no defaults, or c) A borrower who defaulted more than one year earlier (since data are deleted after one year). These three possible interpretations represent altogether different borrower circumstances and profiles, and they need to be differentiated for credit risk purposes. Third, the data available at eCIB are not always up to date. Operationally, it is quite cumbersome for member financial institutions to update real-time loan information. Members upload their loan information to eCIB on the 15th of each month. If a person takes out one or more loans on the 16th of a month, this increase in his liabilities will not show up for another month, permitting multiple loan gathering and using one loan to pay off another, behavior that would be captured with more current data. As mentioned above, all banks now must report all loans to the SBP. One prominent international donor suspects that many banks did not even fully report their loans over PKR 500,000 prior to the floors removal. The inference then is that there is probably even less compliance on the new requirement to report all loans. One can conclude that either the number of loans is too overwhelming to meet the monthly reporting date, or banks do not have the internal capacity and MIS to cope with the requirement. Another factor affecting the quality of the eCIB data base is that because compliance is mandatory, banks conform but without understanding the reasons or the value of strict and accurate compliance. Banks obliged to send data to eCIB reportedly do not like the aggravation of the reporting routine so they are not motivated to send in correct or current data. Some even use Excel or old manual spreadsheets. The inevitable result is that eCIB receives incomplete or incorrect data. When recognized, eCIB returns the data to the financial institution with the order to correct or improve it. This response adds to the FIs compliance burden but ideally corrects errors in the eCIBs data base. SBP has the right to fine banks for noncompliance, but one large bank commented that it is worth the cost to pay the fine rather than
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spend the time complying or correcting input. Controls and processing are not up to modern standards among us lenders, stated one banker. In addition, mid-level bank employees do not know how to analyze the eCIB credit report they receive. They just pass it along to management to use as a negative in their loan decision-making. Several CEOs of the regulated MFPs were not familiar with the eCIB credit report itself. Contributors to the eCIB data base and recipients of the eCIB credit report voiced a number of concerns about the eCIB process. Listing them here is meant to illustrate the kinds of problems that even a mature CIB can have. The list is also meant to act as a guide for what a new MFCIB might face. 1) The problems with eCIB are that (a) repaid loans are not reflected in their credit reports, (b) loan data are 5-6 weeks out of date, and (c) the reports do not cover all of a persons liabilities. Various family members borrow for other family members, so you dont know total exposure. The concern here is over-extension of credit. The eCIB does not have the expertise to sort incoming data well for errors. Technicians at eCIB are not sensitive to misspellings. The eCIB takes data at face value as supplied by the FIs without question. This leads to errors and a low hit rate (percentage of time that an inquiry matches information held in the data base on the individual or company.) The eCIB sometimes disburses incorrect or ambiguous data, which causes the bank a problem in decision making. For example, one bank received two different reports from the eCIB on the same day showing different outstanding for the same person, and in another instance the same company generated three different outputs under three different names. The problems with eCIB are with connectivity and the fact that mistakes do not get rectified immediately. The latter may result in an incorrect assessment for the potential borrower. At times the eCIB server is down (once or twice a week for 3-4 hours), so the bank cannot access information on a timely as-needed basis. It would be useful to know which banks have made loans to a customer and which loans from which banks he has defaulted on. The eCIB report shows loans at a certain number of banks and one default but not the names of the banks where this activity took place.
2) 3) 4)
5)
6)
7) 8)
Finally, it is alleged by a small number of financial institutions that the eCIB is operating in a commercial manner, which should not be the role of a central bank (aside from income derived from foreign exchange investments). Critics say that a
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central banks mandate is to promote monetary stability and protect the health of the banking system, not to generate income. These allegations prompted several responses from SBP: (i) We are only covering our costs and besides any surplus automatically go into the general budgetary fund. (ii) The expenditures of the eCIB division are much more than its income. (iii) We need the revenue to ensure the functioning of an effective credit information bureau, which is integral to promoting financial discipline, prudent lending and better credit risk management by the financial institutions. (iv) The eCIB usage charges are minimum in order to restrict financial institutions from undue use. (v) We are considering privatizing the eCIB at some future point. As the consultant was unable to examine eCIBs financials, the validity of these allegations and responses could not be tested. B. Private Sector Credit Bureaus There are four CIBs operating in the private sector with varying degrees of expertise and scope. None of them was willing or able to provide much detail on their operations or finances so the commentary below is only brief. Our assessment of eCIB above is deeper and broader and more critical because (a) much more information is publicly available and (b) there are many more users of eCIB output compared to the private bureaus. Data Check was founded in 1996 and started CIB operations in 2001 when Citibank and ABN Amro agreed to send negative customer loan data to Data Check. The company currently has reciprocity arrangements with more than twenty such retail financial institutions. Data Check responds to fee-based inquiries with reports that they claim cover 96% of the consumer market in credit cards. Data Check charges about 60 rupees per inquiry, twice the rate of the eCIB, but it adds value with a faster turnaround time. Unlike other CIBs in Pakistan, Data Check does not rely on the standard ID number (the NIC) to verify identities but relies on its own proprietary algorithm. The company has payment records on 1.5 million borrowers (mostly credit card holders) and receives 150,000 inquiries a month from institutions in the regulated financial sector. The breadth of its consumer data base is indicated by their hit rate of 80%, which means that eight out of ten times they do have data on an individual or company when it is requested by a contributing member of the CIB. This rate is ostensibly better than eCIBs. The average size of an inquiry to Data Check is PKR 300,000 (about $5,000). Tariq Nasim Jan, the Managing Director, expects growth in the number of MFIs to be very steep, which, if this is the case, presents an additional reason for a bureau dedicated to covering the MF sector.
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The World Banks IFC is helping Data Check introduce credit scoring which should add another dimension. The IFC is also encouraging Data Check to take a further move into positive information sharing. NEWS-VIS Credit Information Services. This CIB is the sister company of JCRVIS Credit Rating Company Ltd. which assigns credit ratings to all banks in Pakistan. NEWS-VIS CIS runs off a unique data base built in 1996, and its CIB function began in 2004. The information it gathers is not monthly consumer or corporate loan performance data from creditors but rather newspaper accounts of peoples financial problems, such as, bankruptcies, court cases, delinquencies, fraud, and those being sued derived from public information sources. News-VIS may be considered a negative information bureau and not strictly a CIB, as it only collects negative information on companies and individuals available from public sources, information that might indicate poor character. They deem themselves a private research company, a simple data collector/provider that is not regulated. The CIB is owned by a major newspaper agency in the country, giving it access to large public sources of information. The staff of News-VIS scans up to 20 newspapers from all parts of the country each day for the names of companies and people who have a negative financial record of some sort. Company revenue derives from fees charged to clients (banks and corporations) who inquire about a particular person or company. This practice gives News-VIS a unique niche, because they have data that other companies do not have and data that go back to 1996. Their turnaround time for inquiring clients is 24 hours by email (not online). NEWS-VIS charges an annual fee (undisclosed) and PKR 100 per inquiry about a person or company, whether there is a hit on their database or not. They receive about 1,500 inquiries per day. The information on companies in News-VISs database covers over a million individuals and companies. Like Data Check, they do not use the NIC but have confidence that their own software will correctly identify people through crosschecking means and strong search capabilities. The data management and searching software were developed in-house by the company. The number of institutions using News-VIS services has rapidly increased as consumer financing has expanded in Pakistan and with it the number of defaults and delinquencies. Clients include leasing companies and mudarabas, although the credit card, auto finance, and mortgage departments of some commercial banks do make periodic requests for information. News-VIS offers online reporting to its clients and permits users to search for individuals and firms from its public sources database. Their reports supplement the credit reports that financial institutions and other CIBs produce. NEWS-VIS is the first credit checking entity in Pakistan to receive information on rents not paid. The supplier of these default data is a former state-owned entity now corporatized and named House Building Finance Corp (HBFC).
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Finally, JCR-VIS has expressed an interest in collaborating with an MFCIB, perhaps first on a trial basis, to determine if their database can easily absorb MFI information. They contend they have the software and technology to become a third-party warehouse to integrate all information from MFIs. PMN for its part has expressed a willingness to talk further. Credit Chex is the newest private CIB in Pakistan. It is owned by the local JS Group and DCD Capital in the United States. Credit Chex has a partnership with the largest consumer credit information provider in the world, Experian. Experian is a global leader with $3 billion in annual revenues and credit bureau operations in 40 countries with joint ventures in another 20 countries to build and run credit bureaus. Credit Chexs intention is to be a full-fledged CIB covering all of Pakistan for all financial and non-financial institutions whether regulated or not. They want to offer more information to lenders than is currently available, including scoring, debt management and collections, and fraud detection. In addition to that, they have submitted proposals to Pakistani banks to help them with their Basel-II compliance. Credit Chex intends to bring utilities, retail and telecom into their fold, creating a massive data base of borrower data that covers the MF consumer segment as well. In the meantime, they are offering advice on data management and running seminars to educate the stakeholders. They call themselves a total risk management solutions provider for the consumer economy. In their view, the output offered by the eCIB at State Bank is limited, and it will take years to bring it up to standards in technology and data management. Moreover, as a state-run entity, eCIB will lag in trying to react to the changing needs of the credit markets. Credit Chex believes there should not be a separate MFCIB which segments the market. Instead there should be a single robust consumer credit bureau. Then in February the company announced that PlaNet Finance, an International NGO dedicated to the development of microfinance around the world, signed up with their partner Experian for the delivery of CIB software for microfinance institutions. Thus, Credit Chex is positioning itself to enter that market as well. Until the MF sector matures in its utilization of a credit bureau products and services, PMN should take the lead and act as an interim MFCIB. Credit Chex has offered to work with PMN in this role and to provide revenue in return for data sharing. International Credit Information Ltd (ICIL). While this company is perceived locally as a credit information bureau, it does not really function like one. The company is more an information collector, data verifier and debt recovery firm. It receives as many as 7,000 requests each month to verify a borrowers address and income. It represents Dun & Bradstreet in Pakistan and offers overseas receivables management and collection for Pakistani exporters. ICIL has data that are complementary to a CIB. Senior people at ICIL have expressed interest in working with an MFCIB.
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In sum, Data Check collects information from financial institutions and on credit card holders; JCR-VIS gathers publicly available data on delinquencies, bankruptcies and court cases; and ICIL does a complementary service of income verification, address verification, and overseas receivables management for clients. Credit Chex intends to be a one-stop shop for credit information. C. Demand for Micro Credits A critical factor in any feasibility study is an accurate forecast of the level of potential demand for a new product or service. Definitive demand and supply forecasts are difficult in any country and more so in Pakistan where (a) economic and political policies under the new government (as of March 2008) are uncertain, (b) the evolution of microfinance providers is unclear, and (c) double counting of borrowers is common. 8 In the course of this study, there was much anecdotal evidence that the market for microcredit is growing rapidly and will continue to grow. This evidence came from MFCIB supporters and thus has a built-in optimistic bias. On the other hand, if the MFPs and the GOP take most of the actions listed in Section A above, and then the informal forecasts collected below may prove conservative. Here are the estimates provided by those interviewed: 1. PMN estimates there were 1.45 million active borrowers in the MF sector at the end of 2007, and the outreach is expected to grow to a minimum of three million active borrowers by 2010. In Lahore alone, microfinance outreach grew 8% in just the last three months of 2007. Shore Bank International estimates there are 10 million households in Pakistan in need of microfinance, and only 10% of them are catered to currently. Shore Bank says there should be about 3 million active MF borrowers in 2010. The Financial Sector Strengthening Program (FSSP) estimates there are now about 1.3 million active MF borrowers in Pakistan but admits that the actual number is unclear since there may be not only double counting in the rural areas but also many borrowers may not have been counted. This uncertainty is emblematic of the difficulties of measuring and projecting. The number of clients for Asasahs small business loans has doubled each year since 2003, reached 58,000 in 2007, and they are projecting 500,000 clients by 2011.
2.
3.
4.
If the size of current and future demand is uncertain, so is the supply sidethe availability of funds to finance the anticipated rising demand for micro credits. The CEO of one RSP argued that to reach 10 million poor clients in Pakistan, the MF market will need billions of dollars of liquidity, and where is that going to come from? Domestically, it is not available, he stated. See sections IV B and C below for more on this topic.
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5. 6.
First Microfinance Bank expects to grow from 150,000 customers at the end of 2007 to at least 500,000 by 2010 and to 1 million a few years after that. Some large commercial banks such as National Bank of Pakistan, Habib Bank and Allied Bank are now starting to provide smaller loans, moving down market to capture the anticipated demand, especially as the poor graduate to SME status. Kashf has 250,000 active clients and is aiming at 500,000 clients by the end of 2008 and 1 million by 2010. Network MFB foresees a growing MF business and much potential in the market. Networks credits have grown from PKR 50 million in 2005 to PKR 80 million at the end of 2007. Management expects new loan volume to double to PKR 160 million at the end of 2008.
7. 8.
It seems clear from these estimates that the active participants in microfinance tend to disagree on the size of the actual and potential market but all are quite optimistic about its trajectory. A realistic estimate of the outstanding MF portfolio nationwide at the end of 2007 would be 1.4 million active borrowers, defined as those with loans currently outstanding but not including those who have taken loans but repaid them. If we assume gradual improvements in operating efficiencies, the outreach could grow by 20% a year maximum. A good scenario range would be flat to 20% growth in demand depending on the availability of funding, greater investor interest, and the capacity and willingness of MFIs (esp. MFBs) to manage the growth. For illustrative purposes, we can assume a conservative growth rate of 10% per annum and a more optimistic growth rate of 20% per annum for the next five years and analyze the results. During those five years an MFCIB could be established and ideally be able to handle the increasing number of inquiries. Note that the slower rate of demand for MF yields 1.8 million active borrowers by 2010 which is considerably lower than the three million forecast by both PMN and Shore Bank International. A 20% increase each year in active borrowers yields an estimate of over three million active borrowers by 2012, but this still lags the forecasts of the two prominent organizations. In fact, to meet their forecast of three million by 2010, the growth rate of demand for new loans would have to exceed 30% per annum. This rate may be possible but it is uncertain given the obstacles cited.
10% annual growth rate of MF demand at year end 20% annual growth rate of MF demand at year end
2007 2008 2009 2010 2011 2012
1.35m active borrowers 1.49m 1.63m 1.80m 1.98m 2.17m
2007 2008 2009 2010 2011 2012
1.35m active borrowers 1.62m 1.94m 2.33m 2.80m 3.36
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Under these two growth assumptions, there is scope for an MFCIB to grow a business, especially if donors provide a grant to cover the costs of the first year or two. With fewer arrears and defaults due to the MFCIB, donors could plan on phasing out their contributions to MFPs over time, which would be consistent with government policy of encouraging domestic savings. (See next section.) An urgently needed input from donors is funding the harmonization of the diverse MIS systems of MFPs, permitting them to integrate their data bases smoothly and quickly with the MFCIB. In addition, the Financial Sector Strengthening Program (FSSP) has expressed willingness to facilitate the creation of an MFCIB with financial technical assistance. D. Growing Competition in the Sector The poor in Pakistan do not have access to the formal banking sector and are wary anyway of its rules, costs and intimidating edifices. When in need of liquidity for essential purchases, the poor seek out informal sources of funds, such as relatives, traders, shopkeepers, and money-lenders. It is estimated that more than 80 percent of the credit supply for the poor comes from these sources. Interest rates can range from 50 percent to 120 percent per annum. MFIs have made substantial inroads into tapping the poorer segment of Pakistani society. Despite the inherent limitations of rural travel, illiteracy and operational costs, MFIs are able to do a rather thorough credit check on their microfinance borrowers, urban and rural as well as new and repeat customers. Their credit evaluations usually entail, but are not limited to, the following procedures: Verifying the persons ID by NIC Acquiring two personal references and doing checks on them as well Gathering opinions of group or villagers or neighbors who know the borrower Refusing loans to those who have loans with other MFIs Signing promissory notes or affidavits Using eCIB to see if the person has a credit history or default record Determining a clients cash flow and economic capacity to repay Making loans only for productive business purposes Verifying the place of business and visiting the site to see business cash flow and customer satisfaction Meeting with local groups regularly Checking utility bills to confirm place of residence and see if payment is made
This is a fairly exhaustive checklist, and when group guarantees, extensive personal MFI follow-up, social pressure, and lenders zero tolerance for late payments are added to the picture, it is little wonder that the MFIs claim virtually nil delinquency rates and 100% recovery rates. 9 Offsetting these claims of good performance are
9
The picture is not quite that simple. Two caveats are in order. Caveat #1: MFIs definitions of default and delinquency are known to differ. For example, in many cases the word delinquency is not used until the loan is more than 30 days late, by which time they have usually been collected and thus dont count as delinquent. MFBs and commercial banks, on the other hand, do use the
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two facts: (i) other data sources show MFI portfolio quality actually declining, and (ii) most MFIs agree that there is a need for an MFCIB to help sift borrowers and sort out the competitive environment. There are two types of competition affecting the microfinance market in Pakistan. A. The first type of competition results from the proliferation of MFPs, particularly in the Lahore area, where pro-poor lending institutions are expanding their outreach and overlapping each others territories. This is an uncomfortable shift for MF providers since many of them did not have to worry about competition in the past. Now MFPs complain that their customers are being poached by aggressive marketing on the part of other MFPs. One counter-productive consequence of the greater competition for MF clients has been that different lenders often make loans to the same rural person, not knowing the persons total indebtedness and hence capacity to repay. This situation can be eased considerably by an MFCIB that screens clients better and helps reveal a clients total obligations, hence reducing risk of default. The World Bank has confirmed in a recent study that such a benefit occurs, citing experience in Andhra Pradesh India. In fact, microfinance has been linked successfully to credit bureaus in Bosnia, the Philippines, El Salvador, Bolivia and South Africa as well. Other research 10 reports similar findings, namely that greater competition among MF lenders has increased problems of borrower over-indebtedness, reduced loan repayment incentives, and growing arrears for MFIs. The weakening performance is due in part to the absence of information sharing in these markets. Pakistan is not the only country then where MFIs have spread out over the same region and offered the same kind of services to the same kind of clients, and with the same results. This experience is repeated in Latin America (Bolivia, El Salvador, and Guatemala) and in Africa (Benin, Egypt and Morocco). MFIs in Lahore have known for years about their clients multiple borrowing, but under the pressure of competition, they have responded by (a) using predatory tactics (commission agents and staff poaching) to gain clients and to recover arrears, and (b) taking shortcuts in lending practices, such as client appraisal and monitoring, in order to provide faster loan processing time and lower client transaction costs. MFIs in Lahore have not grasped fully yet the meaning of free and fair competition. For example, if suppliers all have similar products, they need to diversify products or lower their rates in order to draw in new clients. For the MFIs this means offering more housing loans, wedding loans, and loans for emergency health reasons. MFIs will be comfortable diversifying their products and market segments once their
international classification rules for overdue credits. A lack of consistent terminology skews the data reported by MFIs. Caveat #2: Data from the PMN show that given the rapid expansion of the sector, portfolio quality has actually declined at some MFPs as measured by portfolio-at-risk beyond 30, 60 and 90 days. See PMNs Pakistan Microfinance Review 2006, pp. 12-13. 10 Jill Luoto, Craig McIntosh, and Bruce Wydick, Credit Information Systems in Less-Developed Countries: A Test with Microfinance in Guatemala, The University of Chicago Press, 2007, p. 3.
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concern over credit risk is eased (enter the MFCIB), and once fair competition forces them to meet the differing needs of clients. The growing competition should accelerate the spread of financial options to underserved rural and urban areas and support the need for an MFCIB. With more customers will there is an even greater need for an MFCIB that can manage the demands of a larger loan base. An MFCIB will also relieve the pressure on MFP field staff who tries to juggle client screening, appraisal, loan disbursement, monitoring and recoveries 11. B. The second type of competition is the new trend where commercial banks are increasingly moving down market and reaching out to SMEs and slowly into microfinance as they see profit and growth opportunities. The big banks traditional market is listed corporations, but that sector is saturated and highly competitive, causing margin squeeze. According to CGAP commercial banks have potential competitive advantages in a number of areas compared to many MFIs, such as recognizable consumer brand names, existing infrastructure and internal systems, established accounting systems, a stable deposit base, and access to capital 12. Abetting this trend is the State Bank, which has issued guidelines to support commercial banks to undertake microfinance business activities. Commercial banks have several options in entering this market; they may open MF windows in existing bank branches, open a stand-alone MF branch, establish an independent MF subsidiary, or enter into partnerships with NGOs and MFIs. All commercial banks have introduced basic banking accounts (minimum initial deposit of PKR 1000, no minimum balance) to extend their reach to low-income families and the poor. The Government is also in the process of rationalizing tax incentives to promote money transfers, mobile banking, and the use of related technology and applications for expanded nationwide outreach of financial services. As this down-market process proceeds, commercial banks with MF branches or windows will have a huge potential to expand microfinance outreach. Given their resources, size and experience, they can offer their services in remote areas. The result will be greater competition vis--vis existing MFPs and a larger volume of business for an MFCIB. E. Supportive Factors for an MFCIB Discussions were held over a three-month period between September 2007 and April 2008 with senior officials representing government agencies, private credit bureaus, commercial banks, all major MFPs (including MFBs and NGOs) and donors. Those interviewed were invariably open and enthusiastic about a CIB to
Pakistan Microfinance Network and Shore Bank International Ltd., The Dynamics of Microfinance Expansion in Lahore, Islamabad, June 2007, page 16. 12 Consultative Group to Assist the Poor (CGAP), Commercial Banks and Microfinance: Evolving Models of Success, Focus Note #28, June 2005, page 1.
11
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cover the MF sector and they suggested many useful ideas. Their names and organizations are shown in Annex A. E.1. Consensus Regarding the Need for an MFCIB The most important finding was that a new CIB spanning the MF sector is greatly needed and should be created as soon as possible. The near unanimity of opinion is important because new CIBs in other countries founder on lack of consensus. All of the MFIs, credit information gathers, government agencies and donors interviewed expressed a uniformly positive attitude to the idea of a CIB dedicated to the MF sector. The fastest growing segment of new borrowers is the urban and rural poor who make use of micro-loans. As new and potential borrowers, they represent a vast data base that an MFCIB will be positioned to capture. (The eCIB is also positioned to capture these data.) The Stakeholder Matrix on the following pages highlights some of the findings from a sample of microfinance banks, commercial banks, credit bureaus, NGOs, donors, and the Pakistan Microfinance Network. A consensus on the need for an MFCIB is clearly shown. The main conclusions are as follows: 1. The overwhelming majority of stakeholders is enthusiastic and wishes to move forward as soon as possible without further studies and delays. They cite the experience of other countries that state they wish they had started a CIB two or three years earlier. Those most enthusiastic were most eager to commit their own time, money and human resources to enable the startup of an MFCIB. They were also willing to share their customer data with the MFCIB, although some respondents were reluctant to provide both positive and negative payment information. Much less interest in an MFCIB was evinced by eCIB and some of the larger commercial banks who do not envision the MF market as part of their strategic plan. The attitude of commercial banks may change, however, as the gross NPLs of the banking industry rose from 5.8% of gross advances in 2006 to 6.5% of gross advances at the end of 2007. The Pakistan Microfinance Network whose members account for 96% of microfinance lending is squarely supportive of a CIB. In fact, PMN has started a pilot project for an MFCIB whose participants will be the MFPs in the highly competitive Lahore MF market. Respondents did not seem to worry how the MFCIB would be funded. They assumed that the beneficiaries of an MF credit bureau, i.e., the MFIs, would find it in their interest to provide the initial capital investment. With further support from donors, the MFCIB should be able to sustain itself for the four or five years needed to reach break-even.
2.
3.
4.
Some of the opinions shown in the matrix are mixed-to-negative with respect to a new MFCIB. Several respondents were concerned about its feasibility, pointing to the outmoded and inefficient state of MFIs MIS systems and IT infrastructure and
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the MFIs institutional capacity and willingness to make an MFCIB work. We will deal with these issues and obstacles in Section II E.
Table 6: Stakeholder Matrix

Fig. 1a Stakeholder
Stakeholder Analysis Matrix: Level of Interest: the Key Participants

Position in Pakistans financial system Repository of credit data from regulated financial institutions Level of interest Willingness to commit in an MFCIB resources to MFCIB No interest, one not needed Cannot, would be conflict of interest with eCIB Is funding pilot project for MFCIB in Lahore Yes, definitely Not now; more interested in SME sector None Yes, in joint venture sense Very willing; will improve credit culture Very willing; CEO is leading MF advocate Will commit resources
SBPs eCIB
Non-profit association Pakistan Microfinance of 19 MF providers Very high Network (PMN) covering 95% of market National Bank of Pak. UBL ABN-Amro Credit Chex Khushhali MFB Tameer MFB First MFB PPAF Kashf Foundation Asasah Largest commercial bank 2nd largest private bank; frontrunner in consumer finance Large foreign bank Newest private CIB, backed by Experian and JS Group High; would help our business Low at the moment, not high on their agenda Very little Strong
Largest MFB with 1/3 Strong of market outreach MFB trendsetter; makes individual loans Very high
First & largest private Highly interested, MFB firmly on board MFIs main provider of wholesale funding Biggest NGO in MF First NGO-MFI with commercial funding Introduced Shariahcompliant MF in Pakistan
Moderate; will help Yes, some TA partner organizations Very high Yes, would take leadership role
Very high, want to reduce verification Yes costs, keep PAR=0 Worthwhile to Contribute time and share data & learn effort good practices Yes
Akhuwat DAMEN
Non-profit NGO, Absolutely clear loans to rural women that we need it.
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FSSP National RSP Punjab RSP Shore Bank Intl Fig. 1b Stakeholder
Financial TA to MFIs Manages Pakistans largest MF portfolio. Micro-credit not a priority; social mobilization is Financial services provider
High Moderate to high None High
Yes, TA Yes No Yes
Stakeholder Analysis Matrix: Timing and Information Availability

Market conditions right for MFCIB? Ambivalent response Willingness to share info with MFCIB Not willing/interested Extent of debtor payment history
SBPs eCIB Pakistan Microfinance Network (PMN)
One year available
Believes so, is Yes, PMN testing it with pilot PMN not a creditor database available project Some branches go back years
Yes, both defaults National Bank of Yes, as long as & MF market Pak. data are secure growing UBL ABN-Amro Credit Chex Khushhali MFB Tameer MFB
Yes, most banks Yes, need broader, Three years moving toward MF deeper client data, Yes Volume of MF loans too small Yes, an MFCIB will capture the liars, reduce lending risks Yes, MF market taking off Market yes, MIS no Yes Yes Yes, needed Yes, MF loan demand growing fast Yes, for pilot project, not for nation-wide Not applicable* Yes NA NA 5-6 years Two years
Yes, timing is right Yes, definitely Absolutely Yes, both positive and negative Yes Definitely Yes, all their data Yes, of course Yes
First MFB PPAF Kashf Foundation Asasah Akhuwat DAMEN
About 6 years Two years Four years Five years (not all computerized) From 2003 Ten years
FSSP
NA
NA
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National RSP Punjab RSP Shore Bank Intl
Yes, needed for better screening of Yes clients Have no idea Didnt see it as needful NA
Back to 1992 Seven years NA
Yes, sooner the better * NA = not applicable
Fig. 1c Stakeholder SBPs eCIB Pakistan Microfinance Network (PMN)
Stakeholder Analysis Matrix: Issues/Obstacles to an MFCIB

Satisfied with eCIB process Quality of eCIB reports Obstacles to an MFCIB
Working to improve Working to improve None stated NA NA Cost and time and necessary expertise
Cumbersome, timeconsuming; National Bank of software & interface problems; need Pakistan faster service, better help-desk eCIB server often down Generally, yes No, primitive & static Painfully difficult to enter data on eCIB format Connectivity not good; time lost Have no need for inquiries since loan size small + KYC NA NA NA NA
Generally satisfactory; make inquiries to private CIBs Ambiguous or incorrect data sometimes; client liabilities understated Good, helpful Incomplete, not timely Quite useful and beneficial Info is good
Outmoded IT, inaccurate credit data
UBL
Collecting accurate data, making it commercial No response NGOs not interested Legal environment not entirely conducive; stakeholder rights not clear; insufficient MF volume Big NGOs may not want to join
ABN-Amro Credit Chex Khushhali MFB Tameer MFB First MFB PPAF Kashf Foundation Asasah Akhuwat
Credit history of Managing mass data, friendly clients not available regulation, and improving the on real-time basis culture of paying for a service. NA NA NA NA MFIs have differing MIS systems and inaccurate data National ID cards not universal Accurate borrower ID system Sufficient willingness of members to make it work
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DAMEN FSSP National RSP Punjab RSP Shore Bank Intl
NA NA NA NA NA
NA NA NA NA NA
Institutional capacity of MFIs, and gaps in the laws MFI reluctance MFI data bases incompatible; their data full of errors Didnt know Quality of MIS and IT infrastructure
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Fig. 1d Stakeholder
Stakeholder Analysis Matrix: Regulatory/Ownership Issues

Who should own/ regulate an MFCIB? SBP Stake for SBP? MFCIB how financed?
SBPs eCIB
Cannot own; would By banks, MFIs and be conflict of investors interest No Donors or members or another private CIB By members of MFCIB Major FIs, development banks
Pakistan Microfinance Network The MFP members (PMN)
Doesnt matter who Perhaps; would lend respect & National Bank of Pak. owns MFCIB, but it must be well regulated credibility UBL ABN-Amro Credit Chex Khushhali MFB Tameer MFB Owned by all banks/FIs engaged in MF, SECP No response Private shareholders; SECP Members own, SBP regulate Public/private consortium No direct ownership Private sector No
Donors and/or CIB members
Depends on stakeDonors or SBP holder comfort level Mandate NGO participation? Member & donor funds Investors, members & donors Beneficiaries/donors
First MFB PPAF Kashf Foundation Asasah Akhuwat DAMEN FSSP National RSP Punjab RSP Shore Bank Intl
Must be independent, objective and privately Should facilitate, not regulate owned by member MFIs Private sector Contributing members Members The members Privately owned and independent Private investors; SECP No regulator can add value to microfinance Indifferent No
Yes, if sense of PMN, donors & selflegitimacy required financing Possible Commercially Maybe but not raise Donors or government our costs or be grant suffocating No No No Didnt know Soft loan from PPAF Investors & donors By beneficiaries, e.g., PPAF Not their concern Donors and members
Whoever can meet MF Yes, as subsidizer needs best
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Fig. 1e Stakeholder Membership voluntary or mandatory Voluntary
Stakeholder Analysis Matrix: Membership

Inquiry fees Next step
SBPs eCIB Pakistan Microfinance Network National Bank of Pak. UBL ABN-Amro Credit Chex Khushhali MFB Tameer MFB First MFB PPAF Kashf Foundation Asasah Akhuwat DAMEN FSSP National RSP Punjab RSP Shore Bank Intl
Enough to be Canvass stakeholders; wait for new Credit Bureaus Draft Law to financially sustainable over time pass To be determined in pilot project Initiate pilot project; open talks with other Pakistani CIBs Get SBP involvement to facilitate process Big stakeholders (Tameer, Khushhali, SMEDA) No response Will meet with PMN and suggest cooperation Get commitment and funding from stakeholders Make pilot project a success Implement the Lahore pilot project Promote understanding and achieve consensus among MFIs
Undecided
Mandatory; otherwise database PKR 50 per inquiry incomplete Voluntary Voluntary Voluntary; their value added will bring clients Very, very nominal NA Subsidized through the funding
Preferably voluntary Really minimal Mandatory since NGOs wont do it otherwise PKR 5
Mandatory for MFIs PKR 5-10 and MFBs Voluntary Voluntary Voluntary Modest Do a business plan first Minimal to start
Form a working committee of big players to examine issues

Policy discussions among stakeholders Joint public-private efforts
Voluntary, members None have nothing to lose Voluntary Mandatory
Didnt specify but low Stakeholders must gather and to keep costs down reach consensus on details Low Explain benefits to MFIs Assess MFIs MIS None
Voluntary with PMN PKR 30 very high as coordinator No reply No idea
Preferably voluntary Subsidized at outset Get both PMN and SBP on board
E.2. Conditions Favoring a CIB for MFIs
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Aside from the clear consensus revealed, research and interviews uncovered a number of other positive factors that will facilitate the introduction of an MFCIB. See Tables 7 and 8 for both solicited and unsolicited comments demonstrating support. 1. There is unqualified support at the highest government levels for extending financial services throughout the country via MFIs. The Governor of the SBP stated in a presentation in February 2007 that a credit bureau is a part of this core basic infrastructure. The Government is committed to financial sector reform. Speeches, presentations, and policy statements by senior officials all affirm the Governments commitment to building institutions that will promote financial and social sustainability. The regulatory and legal regimes, which in many cases are serious roadblocks to a CIB, are generally favorable in Pakistan. (See Table 9.) Participants understand that for a bureau to become fully functional and for its stakeholders to reap its benefits takes at least three years, which is why there is a great need to establish a bureau for MFs right now as the sector is booming and will be uncontrollable in 2-3 years time without a CIB. The microfinance sector has huge upside potential (25-30 million borrowers) which creditors are increasingly eager to tap. Even though at present it is not feasible in terms of cost, the estimated market growth will lead to a high volume of report generation and thus result in increasing MFCIB revenues. Advances in telecommunications and the broadening of Internet access throughout the country have laid a foundation for rapid growth in the transfer of financial information. Data sources and data recipients are increasingly interconnected. For a CIB to succeed there has to be demand for the service being provided, in this case credit information. Such demand cannot be imposed by ordinance from the top; it must be generated from the ground up, by creditors seeing the benefits. This condition exists in Pakistan. Unsolicited comments of support by those interviewed are shown in Table 7. NADRA has issued 61 million national identity cards (NIC) nationwide (38% of the population) that amount to an unassailable and unique ID certificate for all citizens. Each NIC is a computerized printed card with a complete data base on it and it significantly reduces instances of mistaken ID or fraud. The NADRA data base is currently being used as an intermediary check point between regulated banks and eCIB. NADRA told us, We are certainly willing to help you with a CIB. If (a) MFIs are keen to improve their financials for the sake of survival, and (b) SBP is serious about extending outreach and reducing financial risk, then MFIs should be able to link into NADRA, virtually eliminating borrower ID problems.
2.
3. 4.
5.
6.
7.
8.
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Table 7: Unsolicited Statements in Support of an MFCIB

The market is huge and untapped. A MFCIB will meet the growing need. The sky is the limit in MF. Its a question of institutional capacity to meet the demand. Its great that a MFCIB is being discussed; theres a strong need for it. It will add value and mitigate risk. A broader CIB is important because it will further develop a credit culture and a credit history for a relatively untapped set of borrowers. Our concern is that we dont have a full debt picture of borrowers who take out multiple loans. Forty percent of the time clients are borrowing from other organizations, and we find out only after the loan has been made. A CIB can help us here. Our biggest problem is that we cant tell if a borrower has other loans outstanding, because the NGOs and MFBs work the same territory and dont communicate through a CIB, so a CIB will help reduce our worry about the over-extension of credit to an individual or family. It will be difficult to grow the market without a CIB. There are liars [who perjure themselves on affidavits] and fraudsters out there. An MFCIB will capture more information, making lending less risky. It is the right time to get started since it will take 2-3 years to become viable. Its best to get started now and grow into the market. It will take years for the CIB to get to smooth operational level with a sufficiently large data base. The current expansion of the market is too fast, but the good news is, it is demand-driven. A larger data pool will result in more current and accurate client information. A CIB would help reduce the cost of staff follow up, and it would reduce the pressure on our staff to recover debt. It will help us reduce unforeseen delinquencies. There is a severe need for a MF credit bureau because there is currently an increasing overextension of credit and no clear track of loans that have been taken previously or the number of loans the person is currently paying off. The timing for this project is good. If it is not done in now and delayed for a few years, there will be far too many defaults by then since it takes a bureau 2-3 years to be in full swing. There is an absolute need for a CIB to cover all MF customers. Only 1.5 million are now covered out of a potential of 30 million.
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A CIB for the MF Sector has been discussed many times, and now it is about time it becomes a reality as there is an increasing information gap regarding potential borrower information
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Table 8: Is There a Need for an MFCIB?

Hypothetical Question: If default rates are low and the recovery rates on delinquencies are high in the MF sector, why do we need a CIB dedicated to the microfinance sector? Answers by Participants: Will provide access to the largest pool of borrowers in the country, both actual and potential A growing client base means more delinquencies so we need more information on clients The number of MFIs in Pakistan is expected to grow as the market potential is realized by donors and foundations outside Pakistan, which would contribute to the growing demand With growing competition pressures, MFIs will need an extra tool to supplement their internal credit management procedures and at the same time lower transaction costs Larger loan sizes mean greater exposure, which an MFCIB can mitigate Will reduce the instances of debtor parallel borrowing and over-borrowing from multiple lenders, which builds borrower indebtedness and impacts capacity to repay Will screen clients more effectively, reducing unforeseen delinquencies Will reduce the costs of client assessment, monitoring and personal follow up Will reduce instances of fraud Will reveal the real and total indebtedness of clients Will speed up the time between loan application and disbursement Will comply with the government policy of greater financial inclusion With the growing mobilization of domestic savings by commercial and MF banks, a MFCIB will facilitate increased MF lending, which will in turn necessitate more client information Will accelerate the trend of more loans to individuals (compared to group lending) which will bring a better understanding of who is using the loan
Will speed up the provision of both positive and negative information on borrowers.
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F. Obstacles to an MFCIB Despite the compelling support, both formal and informal, there are a number of barriers on the path to an eventual MFCIB. These barriers are legal, commercial, MIS, data quality, political, attitudinal and competitive. There are difficulties creating any CIB in any emerging market. Peer Stein is Head of Financial Infrastructure and Institution Building at the IFC (a member of the World Bank Group), and he addressed a credit bureau conference in 2006 in Cape Town, South Africa. He listed these obstacles: Building awareness, changing perceptions and educating stakeholders Persuading lenders to share positive information Ensuring a CIBs commercial viability Appropriate laws and regulations Data quality Providing for proper supervision and codes of conduct Ensuring consumer rights and data protection
Throughout this report these obstacles are addressed with reference to where Pakistan stands. To begin with, Table 9 shows the most important obstacles to creating a CIB based on worldwide experience and compares Pakistans current status to these generic hurdles. F.1. The Legal Stumbling Block. While the legal and regulatory climate is conducive to creating an MFCIB, the largest obstacle nonetheless remains a legal one. It is not that laws explicitly prohibit CIBtype financial intermediation; rather the laws and ordinances are either non-existent, or ambiguous, or laden with loopholes. There is currently no regulatory framework for private CIBs and there are restrictions on banks sharing their clients data with anyone except the SBP. The SBP itself is not permitted to disclose the names of the financial institutions that have lent to a particular borrower. That said, a draft Credit Bureaus Act is in process, wending its way through the appropriate legislative channels. The law will provide a regulatory framework for the operation of CIBs in the private sector. (See Section III d below.) The main obstacle to setting up a MFCIB in Pakistan is the Banking Companies Ordinance, because according to this law, financial institutions are prohibited from sharing information about their clients with third parties. To be specific, Section 33A (titled Fidelity and Secrecy) Subsection 1 states:
...every bank and financial institution shall, except as otherwise required by law, observe the practices and usage customary among bankers and, in particular, shall not divulge any information relating to the affairs of its customers except in circumstances in which it is, in accordance with law, practice and usage customary among bankers, necessary or appropriate for a bank to divulge such information.
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Table 9: Obstacles to a Credit Information Bureau
Global Experience 1. Lack of support or consensus among the primary parties involved in credit transactions: commercial banks, MFIs, NBFIs, and government authorities. 2. The lack of a sponsor, such as a bankers association or a major bank or entrepreneur, who assumes ownership of the CIB concept, drives it forward and makes it happen. 3. An unwillingness or reluctance on the part of MF lenders to exchange proprietary or confidential information with others for fear of loss of their comparative advantage and market share. 4. A legal/regulatory environment that hampers the distribution of financial information due to concerns over privacy. 5. The absence of reliable data on the payment histories of physical and legal entities
Pakistan High degree of support and consensus found among all potential stakeholders Several MFB CEOs, Kashf and PMN have expressed great interest & could be sponsors; PMN undertaking pilot project in Lahore Remains to be seen. Pilot project will be test. Much debt info already being shared informally and with the private CIBs Not a major obstacle in Pakistan; SBP supports the CIB project Personal data generally reliable due to NADRA and NIC, but absence of long payment histories Unique ID for individuals exists but not widespread; audited financials not an MF issue Pakistan has already undertaken major financial reforms; delays possible due to political uncertainty (a) Not true, (b) partially true and (c) partially true. Need to improve the culture of trust and paying for a service
6. The absence of credible or audited financial statements from commercial entities and a unique identifier for individuals. 7. Delays by authorities to create appropriate legal regime for a credit bureau.
8. A culture or history that (a) discourages individual risk-taking, competition and a market mentality, (b) values secrecy or discourages information sharing; (c) has little experience with credit and instead transacts on a cash or barter basis, yielding little debt payment history for the CIB. 9. An attempt by the founders of a CIB to do too PMN starting a basic pilot much in too short a time, rather than starting with project in Lahore to test the some basic activities and building on them over process
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time so that awareness, acceptance and confidence in the CIB can grow. 10. A macroeconomic policy framework characterized by tight money and fiscal discipline, such that economic growth is stifled and therefore lending activity is constrained. 11. Lack of confidence in government or financial institutions
Not the case in Pakistan; buoyant economic growth and lending activity.
SBP competent and respected but public lacks faith in government 12. Domestic or regional political instability that Political uncertainty, radical prevents normal business, including loan issuance elements and implementation and repayment, or a conflict that damages delays could be a problem for incomes/capacity to repay. setting up an MFCIB but they will not affect loan demand growth in the informal sector This injunction not to share credit information is repeated with regard to MFBs in the Microfinance Banks Ordinance, Microfinance Institutions Ordinance 2001, and Prudential Regulations for Microfinance Banks. Under these laws,
...every member, director, auditor and staff member of a microfinance bank, before entering upon his office and performance of duties, must make a declaration of fidelity and secrecy and all matters relating thereto and in particular will not divulge or communicate any information relating to the affairs of its customers, which may result in discharging of duties directly or indirectly, except in circumstances in which it is in accordance with law, practice and usage customary among bankers.
Given these legal restrictions, how can a private CIB like Data Check legitimately acquire the secret and confidential credit information of their bank customers? There are several answers and they provide sufficient room for a new MFCIB to operate. First, data are allowed to be shared if the individual customer gives his or her consent. The banks do give their customers consent forms which they sign if they want a loan. Second, the two passages quoted above contain enough leeway in the language to permit the sharing of credit information. The phrase usage customary among banks includes practices prevalent among financial institutions for conducting the financial affairs of customers and the sharing of information pertaining to customers. Such activity is permitted because it is in connection with an application for financial assistance or service. This language permits bankers to share customer information informally amongst themselves. Neither of these two loopholes has to our knowledge been tested in the courts.
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Third, there is another possible means of avoiding the restrictions on credit information sharing. That is to define the CIB as an association functioning as a closed end user group which may be able under the law to make its own rules. Such an association would be regulated by the SECP. This option needs legal opinion before it is relied upon. State Bank does not see these legal matters as critical. SBP says they can be rectified by legislation, amendments or ordinances. They reaffirm that their goal is to spread the coverage of financial institutions throughout Pakistan and obstacles will be circumvented or removed. Another example of legal gaps In Pakistan is that no legal framework exists for consumer protection, or data sharing practices, or on the reporting of erroneous data. Informal mechanisms do allow consumers to question the quality of reported data either with the financial institution in question or directly with the SBP in case of eCIB. In the case of private credit bureaus, issues of data accuracy must be raised directly with the banks, not with the CIB itself. Usually any disagreement is quietly settled between the banks and borrowers as they prefer not to refer to the judicial system, which takes too long and is subject to judicial asymmetries, i.e., corrupting influences. Finally, it is possible that a separate Credit Information Act may not be needed for an MFCIB to be established. The CEO of an MFB told the consultant that there is no requirement for such a law; the stakeholders can just get together and register a CIB as a private company. The point is moot, however, since the draft Credit Bureaus Act is in the pipeline for passage. F.2. The Social Imperative There is a broadly accepted social imperative in the Government and among MFPs to alleviate poverty, promote equality, and help the most misfortunate in society. MF lenders for the most part operate on the basis of a dual objective whereby social assistance is just as important as making a profit. They perceive microfinance as a poverty-alleviation tool. As a result, they are reluctant to charge commercial rates to their beneficiaries, that is, a rate than covers the full cost of service provision. Standard banking practice is that interest rates (plus fees and other earnings) must cover the cost of funds for onlending, the cost of loan loss risk, and the cost of administration (screening clients, processing loan applications, disbursing loans and collecting payments, etc.) But the MFP approach means they do not have sufficient earnings or capital to attract additional equity investment or to expand their lending activities. It is a formula for stagnation and eventual business failure. A USAID report 13, Microfinance Performance in Pakistan 1999-2005, called this situation a structural flaw in the MF industry. The revenue earned by MFPs
13
Pakistan Microfinance Network and Shore Bank International Ltd., Microfinance Performance in Pakistan, 1999-2005, Islamabad, 2006, page 5.
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through fees, charges, interest payments is characterized as grossly insufficient to cover operating expenses, and this in turn constrains further growth in MF lending and outreach and MFP sustainability. In fact, as the chart below shows, Pakistans MFPs (the lowest line) lag considerably behind their peers worldwide in terms of financial self-sufficiency (defined as revenues minus expenses, including adjustments). Oxford Policy Management (OPML) of the U.K. conducted a survey 14 of MFPs in Pakistan on this subject in 2006 and found that all respondents expressed concern about what they perceived as an excessive focus on the role of microfinance as a poverty alleviation tool. One MFP expressed the view that that the MF sector is small in Pakistan because many of those involved in MF are primarily in the business of poverty alleviation, not the provision of finance. MF is not seen as an independent business but simply as a poverty tool. This view was confirmed by another MFP that pointed out that its primary activity is social mobilization and that MF is just one of the services they provide it is not a mainstream MFP and regards MF as a secondary activity.
Table 10: Financial Self Sufficiency among Pakistani MFPs
Another MFP argued that a problem with microfinance has been that it has been seen principally as a poverty alleviation tool. It can work as one, but it need not be merely a direct poverty alleviation instrument. It can also be a means to create employment and meet the needs of those who are poor, though not necessarily the poorest of the poor. The respondent felt that a host of financial services should be
Oxford Policy Management Ltd. Poverty and Social Impact Assessment: Pakistan Microfinance Policy, May 2006, pp.72-73.
14
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available for the poor and that they should be given choices about the sort of services and products they could use. One MFI, which regards its mission as poverty alleviation, was troubled by the fact that MF is overburdened with the widespread idea that it is simply a poverty alleviation tool, and this is a problem since it does not allow microfinance to develop as a sector in its own right. While it can and does address the poverty problems of a number of clients, this is not the only outcome of a microfinance program, where it can also be instrumental in creating employment and keeping many people out of poverty. Another MFI believes that there is a huge market for microfinance in Pakistan and the sector has great prospects for for-profit entrants and entrepreneurs. The respondent estimated that there was a potential demand nationally for about $2 billion a year in loans and a similar amount in deposits. The respondent felt that if private sector MF banks can deliver these services in a cost-effective manner, they will remain very profitable. The respondent argued that MF is a commercial for-profit enterprise and if poverty was alleviated as a consequence of providing credit, that would be a very desirable by-product but it should not be the MFIs primary goal. One bank respondent reasoned that banks that are (or were) state-owned felt some pressure from the government to make below-cost loans because social welfare is a national priority and such loans are part of the mandate of banks. In Pakistan loan defaults are not a barrier to growth. Thus, increasing revenues is the only way to improve sustainability by adding to capital and building assets across the sector. The gap with peers shown in Table 10 is now being funded by the initial capital investment and continued donor flows. Neither source is indefinitely sustainable. Revenues need to be raised from the 2005 level of 18% yield on portfolio to 34%, which is consistent with yields elsewhere in South Asia. When this situation is viewed from the standpoint of a future MFCIB, the results are twofold: 1. Without surplus earnings, MF lenders do not have enough capital to leverage off of to expand their branch networks or even to become financially sustainable. This financial gap constrains their growth in the MF sector. With less growth come fewer inquiries made to the MFCIB, in turn preventing the CIB from growing its business and improving its technology and services. 2. Cash-strapped or equity-short MF lenders may find it difficult to pay normal commercial rates to the CIB for each inquiry, not to mention an annual membership fee. This brings us back to reliance on donor funding for operations.
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The Governor of SBP stated 15 that existing MFIs (primarily the MFBs and specialized NGOs) have the capacity to reach 3.0 million customers by 2010, if and only if (a) they reach financial sustainability (b) raise private capital (c) build the human resource base In sum, if the sector does not reach its potential and grow to the estimated market of 10 million individuals in the near term, then there will be less need for and support for an MFCIB. Since a CIB serving the MF market needs a growing volume of inquiries to survive, a more market-oriented approach is needed or an MFCIB will not succeed on its own. F.3. MFI Reluctance Some MFIs, especially the wholesale NGOs and smaller MFPs, expressed reluctance to join or support an MFCIB. Their reasoning boiled down to fear of competition and fear of change. 1. There are administrative costs in supplying the data to the MFCIB, costs which will not be recovered for two or more years due to lower overhead expenses. MFIs will ask how much do I have to pay for a credit report relative to the likelihood that the report will be accurate and complete? 16 That is a real issue and one that will take time to prove the CIBs worth. However, current thinking with respect to the pilot project in Lahore is that inquiry fees will start out at nil or only PKR 10. In addition, MFIs do not have sufficiently trained staff to handle new technical or administrative burden, and the task of upgrading personnel and hardware seems daunting. The incapacity of the management information systems of many MFIs to provide information on a regular and reliable basis is yet another challenge to the growth of credit bureaus. MFIs are supported by PPAF and international donors and have little incentive to change their routine, because they are not being held truly accountable by their patrons. They are reluctant to divulge their loan data and open their books to inspection because they may run afoul of government regulations. Greater transparency will only invite greater scrutiny by the authorities, they reason.
2.
3.
4.
5.
6.
15
Dr. Shamshad Akhtar, Governor, State Bank of Pakistan, Expanding Microfinance Outreach in Pakistan, a presentation to the Prime Minister, February 14, 2007. 16 This is an altogether appropriate question for MFPs whose expenses already exceed revenues. Thanks to Mr. Timothy R. Lyman, Senior Policy Advisor/CGAP, who made this point in a presentation at Boulder Microfinance Training, Turin, Italy, and Summer 2007.
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7.
They worry that their competitors will learn the names of their good borrowers and try to steal them. The response to this commonly-heard excuse is: the MF market is not shrinking where you might have to worry about your market share; instead the market is so untapped that there is room for everyone. NGOs are not constrained by any prudential rules regarding the size or quantity of loans to individual borrowers. No floors, ceilings or percentages so why open up potential difficulties by placing oneself under the microscope?
8.
Overcoming this reluctance may be achieved by education and by the demonstration effect of a successful MFICB. Failing that, these MFPs will probably not survive commercially in tomorrows Pakistan. The good news is that the major MFPs (Kashf, NRSP, Tameer MF Bank, the First Micro Finance Bank, and Khushhali Bank) can make the MFCIB work without the smaller, more reluctant stakeholders. F.4. The Question of Timing When is the right time to establish an MFCIB? There is no formula or precise schedule for saying now is the time. It will happen after certain conditions have been met in the marketplace. These developments include (but are not limited to): 1. 2. 3. 4. 5. When the demand for microcredit rises When the legal environment permits and facilitates it When information is highly automated or capable of being so When defaults and fraud start rising When loan delinquencies and write-offs by MFIs start rising
The common element among these conditions is that microfinance lenders will start to feel overwhelmed by the surge in credits or the rise in their losses, and they will insist on some system to help them cope. Several of these conditions have already manifested themselves or are widely expected, because the PMN decided at the end of September 2007 that the time was right to undertake a CIB pilot project in Lahore. PMN is in discussion with Fincon Services Ltd regarding the best way to proceed. PMN is also holding discussions with the private sector CIBs to see if there are synergies and opportunities to collaborate. Moreover, the Stakeholder Matrix (Figure 1b) showed that a large majority of respondents thought the timing was right for an MFCIB. There are skeptics among stakeholders regarding the timing issue, but they are in a minority. Their contention is that the market is not ready yet. They say there needs to be many more transactions, more individual lending, higher loan amount size, and more competition to make it feasible and sustainable. The Lahore pilot project will be a valuable test case of current market conditions and the willingness of PMN members to cooperate and persist in their endeavor. Time will tell if the timing is right. The matter of timing suggests that disruptions or operational risks could delay and sidetrack the process, for example,
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the lack of timely response on the part of government authorities with regard to laws, regulations, and project implementation 17 political risks, such as changes in government leadership or policies, the imposition of martial law, resulting in caution on part of lenders and donors due to social unrest, e.g., work stoppages, road blockages,
F.5. The Quality of Credit Information In a speech in February 2007, the Governor of SBP, without directly mentioning credit bureaus, referred to the need for banks and other creditors to correctly identify their clients. 18 There exists a comprehensive set of regulations on Know-Your-Customer
(KYC)... All financial institutions (FIs) have to confirm the true identity of every prospective customer and verify the documents obtained from new customers/account holders.
Correct client identification is only one aspect of the data quality issue facing Pakistan. The other aspect is the need for absolute accuracy of the clients debt status and payment record, past and current. Neither aspect is assured yet in Pakistan. Both commercial bankers and MF providers complain openly that borrower data are incomplete and inaccurate. With NPLs among commercial banks currently rising, as mentioned above, the need for greater credit bureau intermediation, including that of an MFCIB, is becoming more evident. For example, terms commonly used internationally in credit markets are defined and used differently by different MFPs in Pakistan. Despite the publication by SBP and PMN of standard definitions, there is lack of agreement among participants on the meaning of such words as arrears, assets, credit, credit risk, default, delinquency, portfolio-at-risk, financial sustainability, impairment and non-performing loans. One donor estimates that 20% of the borrowers booked are double counted. For example, two loans to the same person are counted as two borrowers. Moreover, given the different definitions of delinquency and PAR, a borrowers missed-but-thenmade payments are defined differently. If a person pays his loan off by the end of the year, it is shown on the books as fully paid, even though he may have missed a payment or two within the year but made them up. No arrears show for the months he missed. In Pakistan the bulk of the clientele are individuals. Loans are made to them within the village or community, but their guarantor is the community acting through the local leader. Group-based lending with a social collateral backstop predominates as a product. If an individual cannot make a payment on his MF loan, then the
17
In a February 2008 study, the Asian Development Bank reported that Pakistan has long delays in the implementation of ADB-assisted projects compared to other countries. See Dawn, February 23, 2008, pp. 9-10. 18 Dr. Shamshad Akhtar, Governor, State Bank of Pakistan, Banking Sector Reforms: Performance and Challenges, Speech in Geneva, February 1, 2007, page 9.
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various members of the community who partook in the guarantee step forward and make good the claim. The individual defaulter may find it difficult to get another group loan unless his misfortunes were no fault of his own. Two questions emerge from the group-based lending approach: (1) Who is the real borrower in a group loanthe group or a person in the group? (2) How is a loan defined? Is topping up or rolling over a prior loan a second loan? These questions need answers and standardization. Before a consensus on proceeding with a CIB can be reached, this definitional bouillabaisse needs to be sorted out, cleared up and more universally accepted. Otherwise, participants will make different assumptions about their data and calculate ratios differently and send off these inconsistent data to the MFCIB. The results will undermine the process of integrating financial information and prevent the MFCIB members from benefiting. An MFCIB (or any CIB) cannot function unless all MFPs send and receive information in standardized and compatible formats. In Pakistan different MIS and formats are in use, starting from manual or spreadsheet-based to sophisticated computerized Credit Management Information Systems. As the saying goes, garbage in, garbage out. For an MFCIB to play its intermediary role properly, the data it receives must be accurate and timely and in standard format. Otherwise, it cannot produce accurate credit reports for its clients. Unfortunately, the consultants review of current practices revealed that a lot of the client information collected by the branches of MFPs and forwarded to headquarters and then on to the eCIB or other CIBs is not only inaccurate but out of date. For example, the period of years that MFIs have historical data on clients varied from one year of records to ten years (see the Stakeholder Matrix), and the records kept were in various stages of depth, breadth, accuracy and format. In fact, when queried respondents viewed outmoded MIS and IT infrastructure plus inaccurate credit data as the largest obstacles to starting an MFCIB. In their view the second most significant barrier was MFIs institutional capacity and willingness to make an MFCIB work. There are a number of Institutional and technological means available to improve the quality of credit information. A list would include: Gathering and submitting client data more frequently to CIBs. As we saw, a monthly schedule of submission misses important changes in debtor status. Expediting the distribution of the NADRA NIC to reduce ID errors. Improving the IT infrastructure to reduce the processing time. The IT technology for an upgrade to international best practice is commonly available; it is a matter of financing.
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Expanding the awareness of the public regarding their rights. In Pakistan eCIB does not allow data subjects to access their own credit reports to challenge or correct errors. The private CIBs have stated they will allow this practice. Encouraging the expansion of m-banking and Islamic finance as tested ways of increasing access to finance among the poor. These two channels can be used for basic credit reporting by microfinance institutions. See Section IVC. Promoting linkages between local CIBs and international CIBs to facilitate technology transfer, both software and training. Data Check and Credit Chex have taken this route. To sum up, it is not a software issue or the number of files you have in the data base that brings commercial success and benefit to the credit market. It is an issue of the value of the dataits timely collection, accuracy and management. A CIB data base can have many gigabytes of data, but if inquiries to the CIB do not match any of the files at the CIB, that means most names and files in the data base are not active or accurate. F.6. Other Possible Perils Finally, lets look at a potpourri of potential perils that the research uncovered. At first sight, they appear to be inimical to the startup and growth of an MFCIB. Further discussions with stakeholders added layers of insight and nuance to a relatively complex picture. The four scenarios depicted here are potential threats to MFCIB financial sustainability but less risky than others cited previously, such as data quality issues and legal and commercial barriers. 1. Large NGOs (NRSP, Kashf) have decided to convert (at least partially) to MFB status, bringing them into the regulated formal financial system. Since they will have the right to inquire about clients through the eCIB data base at SBP, the potential volume of client inquiries they may send through the MFCIB could diminish. If so, MFCIB revenues could be significantly reduced, affecting its financial sustainability.
ANSWER: This eventuality will not reduce Kashfs and NRSPs need for an MFCIB because (a) regardless of their legal status, they will still need to do credit searches through the MFCIB data base because it will contain the client information they need more so than other existing CIBs, (b) if the MF market grows as rapidly as expected, other MFIs will compete in the market and they too will need credit checks, and (c) in 2001-02 the Agha Khan RSP transformed its MF program into The First Microfinance Bank and this did not impact the need for MF borrower information.
2. With low levels of non-performing loans (c. 1-2% PAR after 30 days) and high recovery rates (97-99%), MFIs may not need a CIB for their sector. There are few intentional defaulters anyway.
ANSWER: Competition for MF services is growing and those providers who can reduce their operational costs, including credit risk, will have a comparative advantage in the market; that is, they will be able to drop their lending rates, offer
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more products, increase their market share, and achieve greater financial selfsufficiency. The MF market is demand-driven, not supply driven.
3. An unconstitutional regime, the presence of partial law, and the uncertain political environment create hesitation and fear, which in turn delays and complicates policy decisions at the national level. If for an extended period, the uncertainty could also curtail borrowing and jeopardize the volume of inquiries made through an MFCIB.
ANSWER: The impact of political uncertainty is not so much directly on MF borrowing as it is on the perceptions and risk appetites of foreign lenders, investors and donors. At the policy level, it is highly unlikely that any Pakistani government will reverse the priority of poverty alleviation. No matter the political climate, the poor and those denied access to finance will still need to borrow and an MFCIB is a tested means for facilitating the lending process. However, if law and order breaks down around the country, then normal economic activity will be disrupted. Continuing political instability could prompt foreign donors to reduce or halt their contributions to PPAF and other MF providers, which will greatly reduce funds passed through to the clients. Similarly, if SBP caps interest rates or tightens the regulatory regime, then the impact of these measures would likely extend to the MF level.
3.
Corruption in Pakistan is present at many levels and affects the way businesses and government officials operate. 19 The endemic patronage culture is an obvious example. Corruption affects almost all businesses including financial institutions. The most likely entry points for corruption in a CIB are on the sending end (ignoring someones delinquencies) and in the storage/retrieval end where data might be manipulated. In the worst case, if there is (or perceived to be) corruption in the financial sector at large, it could make stakeholders wonder about both sides of the CIB cointhe validity of the data being sent in to the CIB as well as the reports released by the CIB.
ANSWER: No one in the interviews mentioned corruption as a leveraging matter in their financial decisions, and there have been no allegations of such with regard to any CIB in Pakistan. With respect to an MFCIB, the impact could be even less. Trust in the formal financial sector is not a key decision factor for those who borrower micro credits. In fact, the financial sector in Pakistan is rightly regarded as fairly clean and transparent. It is quite unlikely corruption would have a direct impact on a CIB, any CIB.
This section is derived from three sources: Moodys Investors Service Credit Report on Pakistan, 6 Nov 2007, states (page 1) that Pakistans GDP per capita remains very low because output continues to be hindered by weak institutions, pervasive corruption, and low literacy. The second source is an article written in Dawn on 7 October 2007 (page 7) by Kunwar Idris, who reported that of 180 countries surveyed by Transparency International (TI) in 2007, Pakistan ranked 138th in perceived corruption, considerably higher than India at number 75. TI says that corruption cripples public institutions, which contributes to political expediency, perverse public policies, maladministration and sidetracked economic growth. Therefore, it is worth raising the question, will these effects of corruption have an impact on an MFCIB whose feasibility we are ascertaining? The third source is another article in Dawn (19 January 2008, page 13) by Ilhan Niaz, Corruption & the culture of power in South Asia.
19
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5. The macroeconomic climate began to deteriorate in the last quarter of 2007. The country witnessed rising inflation, regular power shortages, crumbling infrastructure, tighter monetary policy, mounting budget deficits, a growing trade deficit, depreciating currency, falling foreign investment, and an increasing debt burden in both local and foreign currency terms. These conditions could affect both borrowers and lenders, dampening loan demand, raising loan rates, and reducing the fee revenues required for an MFCIB to survive commercially.
ANSWER: Conventional wisdom is that the impact of this deteriorating climate will be more in the formal sector of the economy than in the informal sector which is dominated by the poor rural and urban clients. MF clients are in the informal economy with very few links to commercial banks and financial institutions and are thereby somewhat isolated from economic shifts in the formal sector. They need to borrow regardless of monetary and fiscal policy at the national level. 20 However, if the difficulties in the larger economy start to affect farmers and small shopkeepers, such as an increase in the cost of borrowing or the inability to get produce to market, then there could be stress on a borrowers capacity to borrow anew or to repay existing debt. There is the risk that liquidity and investment might become harder for MFIs if global markets deteriorate. This situation would add extra value to an MFCIBs ability to provide information to lenders regarding the borrowers total liability and debt capacity. Thus, demand for new loans may level off, but demand for MFCIB credit checks would not suffer.
20
A study by Microfinance Information Exchange Inc., The Micro Banking Bulletin, Spring 2007, pp.36-38, found no evidence suggesting a strong relationship between changes in macroeconomic variables, such as economic growth rates, and micro-finance indicators, such as PAR>30 days. In other words, MF portfolios have high resilience to economic shocks.
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SECTION III. THE LEGAL AND REGULATORY ENVIRONMENT

A. Government Policy Government policy statements and public presentations about the financial sector in Pakistan invariably include a reaffirmation of the need to create a credit screening institution that will facilitate the broadening of finance to the rural and urban poor. For example, in a speech in Geneva the Governor of the State Bank illustrated how undeveloped the financial sector is in Pakistan. 21
Today, [the] penetration ratio of financial services is low judged by any measure. Thus far less than 20% of the population has access to financial services given Pakistans low depositor base and [given that the] number of borrowers is under 5 million (3% of population). More graphically, there are only 171 deposit accounts per 1000 people and 30 loan accounts per 1000 people. Likewise, only 30% of the adults have bank accounts. [The] credit/GDP ratio at 27% is low judged by country and sector financing requirements or judged by levels prevailing in emerging markets.
Then in a presentation to the Prime Minister two weeks later, the Governor reiterated the need for expanding microfinance outreach and stated that a credit bureau will facilitate the growth of outreach. 22
Evidence has confirmed that a centralized data base of credit histories facilitates microfinance delivery and, among others, reduces default risk of borrowers transaction cost and induces borrowers to maintain good track record for getting effective pricing on what is by and large unsecured lending. SBP would encourage setting up of this institution which will be a member based and fee based organization with representation from all NGOs, MFIs and MFBs that will be legally mandated to provide client information with supportive CNIC.
One concludes that government policy champions the extension of credit information services into the microfinance sector. In Section II E.1., we addressed the matter of legal roadblocks to an MFCIB, such as gaps in the institutional framework and explicit prohibitions in existing ordinances. We concluded that there is no specific provision in Pakistani law that would absolutely forbid the exchange of personal debt information between creditor and a CIB intermediary. It is more a matter of legal omissions and ambiguities than prohibition. Current financial regulations and laws as well as government policy encourage, facilitate or allow the practice. How else to explain the legitimate existence of five CIBs already? B. Recommended Revisions to the Legal and Regulatory Framework
21
Dr. Shamshad Akhtar, Governor, State Bank of Pakistan, Banking Sector Reforms: Performance and Challenges, Speech in Geneva, February 1, 2007. 22 Dr. Shamshad Akhtar, Governor, State Bank of Pakistan, Expanding Microfinance Outreach in Pakistan, a presentation to the Prime Minister, February 14, 2007.
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Four recommendations for revising the current legal and regulatory framework emerged from the research and interviews. First, a Draft Banking Act, 2006, currently awaits National Assembly consideration and likely approval. It contains a section on Banking Secrecy [Section 92(b)] that encourages the exchange of information among banks, either directly between them or through any credit reference bureau authorized by the State Bank for the purpose of credit assessment of any customer or prospective customer. If passed into law, this act will supersede existing constraints mentioned above (Section II E.1.) in the Banking Companies Ordinance. Second, the Pakistan Penal Code should be able to protect a credit bureau or its members from charges of defamation of character with regard to a credit report. This protection is absolutely necessary if the CIB is to do its business without worrying about frivolous lawsuits. Some debtors denied credit based on their past poor performance record may entertain the idea of instigating a law suit against a CIB for publishing a report that damages a persons character. The Pakistan Penal Code, Section 499 entitled Defamation states that
it is not defamation to impute anything which is true concerning any person, if it be for the public good that the imputation is made or published, and deciding whether or not it is for the public good is a question of fact. Therefore in cases where the credit rating of any customer is exchanged it shall, on the assumption of it being correct and accurate, be the truth and shall be for the public good and thus shall not constitute defamation.
However, even the language in this Code may not protect a CIB from lawsuits. We recommend here that language be incorporated in relevant pending legislation, such as the Draft Credit Bureaus Act, that will clarify responsibility for data errors. The principle involved is that the responsibility for data accuracy should be placed in the hands of the supplier of that data. A CIB must assume that the financial data it receives is accurate, and any errors are the responsibility of the data supplier to correct. That places the responsibility to check borrower information firmly on the shoulders of the creditor. This language would help:
No lawsuit or other legal proceedings shall go forward against a credit information bureau or any of its directors, officers or employees for (a) any exchange of credit information that is done in good faith or (b) any damage caused or likely to be caused by anything done or intended to be done as aforesaid.
The third recommended revision relates to a survey by SHMA Consultants of 111 financial institutions in 2004-05. One question in the survey revealed that 97% of those who responded were in favor of an amendment to the SECP Act which would make it mandatory for all the NBFCs that it regulates to report positive and negative debt behavior to a credit bureau. Such an amendment would facilitate membership in an MFCIB so that its data base is deep and broad enough to comprise a meaningful body of debt repayment information and sooner rather than later. If the
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great majority of financial institutions see value in this practice, then the SECP Act should be amended accordingly. In section 35 of the Securities and Exchange Commission of Pakistan Act, 1997, there is an obligation of confidentiality on the part of Commissioners and Board members of the SECP. They may not disclose any information on a person for any purpose other than the performance of his official duties or the performance or exercise of that function or power. However, this restriction on information sharing does not apply if the information exchange is permitted anywhere else in law or if the data subject gives prior consent. Any new laws, such as the draft Credit Bureaus Act, would also supersede this provision. Hence, the provision will not be a roadblock to debt payment information being sent to an MFCIB by any company regulated by SECP. Finally, the Pakistan Poverty Alleviation Fund (PPAF) is a public-private partnership founded in 1999 and incorporated under section 42 of the Companies Act 1984. PPAF is one of the NBFCs that follow the regulatory requirements of the SECP. It is the main provider of wholesale financing to MFPs, such as NRSP, and it is financed mainly by the World Bank and sponsored by the Government of Pakistan. PPAF was created to ensure availability of funds on a continuous basis to NGOs. It passes the funds on as loans to its fifty partner organizations (POs), such as MFIs, microfinance banks, leasing companies, and NGOs who lend to the poor directly at the grassroots level. Given the broad scope of its financial pass-through activities and the potential for a rapid enlargement of MFCIB membership and data base, the consultant asked both SECP and PPAF for their views on requiring PPAFs fifty POs to send their borrower data to an MFCIB. Mr. Akif Saeed, Executive Director at SECP, replied I personally see no issue on mandating information sharing because it benefits the market. Mr. Kamran Akbar, Chief Operating Officer at PPAF, responded: We can look into it; it could be part of our risk management plan.
Thus, both parties are willing to consider the idea as a way of helping the MFCIB become commercially sustainable while at the same time lowering the partner organizations risk profile. The initiative for effecting this beneficial change must come from SECP. As a final note, the matter of who should regulate an MFCIB frequently arose. One regulator suggested that whoever regulates the MFCIB should be driven by who its clients or beneficiaries are because it is their interests that must be protected. If the beneficiaries are banks and MFBs primarily, then the SBP should be regulator. If they are mainly unregulated NGOs and MFIs, then it was not clear what would happen. If it is a mixture of the two, then it is still uncertain. In any case, he said, the regulator should be decided after determining the shareholders, but if the entity does include banks, it will definitely tend to tilt in favor of SBP.
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C. The Draft Credit Bureaus Act A Draft Credit Bureaus Act, 2007 is currently being circulated for comment among various state bodies, such as the SECP, the MOF and SBP. Its progress through the bureaucracies has been slow. We recommend that the Draft Act be expedited through to the Law Ministry and then to the National Assembly for passage. The consultant reviewed the Draft Law and found that it addressed many key principles and conventions needed in such a law based on international standards, such as, the licensing and appropriate functions of a CIB, protection of personal information, penalties for misuse of credit data, and the resolution of disputes. However, if one compares the Draft Law to a list of internationally accepted basic principles of a CIB (see Annex B), then there are some significant omissions and a need for clarification in several areas, such as CIB independence, the responsibility for correct data, and disclosure and security rules. The following is presented with the intention of improving the Draft so that it meets best practice. A few initial observations: The Draft provides appropriately for the establishment, functioning and regulation of the credit information bureaus. New CIBs may be formed subject to registration with the SECP and licensing by SBP. There are no data protection or consumer protection laws in Pakistan, and these areas need to be addressed in the Draft (more than in Part VI of the Draft) as well as in separate legislation. It is unclear if banks are required to have membership in a CIB The Draft does not mention if joint ventures or mergers of existing CIBs are allowed, but one presumes they are. The Draft does not address the matter of whether it would be permitted for SBP to extend its mandate for credit information over the non-regulated sector, thereby capturing MF data from NGOs and RSPs. There is no mention in the Draft of the rights of consumers or MF borrowers to have access to their own reports, either housed at eCIB or another CIB, to challenge or correct their personal data.
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Table 11: Consultants Comments on the Draft Credit Bureaus Act 2007 TA No. 4894-ADB
Section of the Draft Part I, Art. 2 j) Definition of credit information furnisher Comments Credit information bureaus (CIBs) should not be restricted from gathering credit information from any credit source subject to the permission of the source and data security rules. Article 2j omits mention of other potential data furnishers of credit data on individuals, such as the revenue authorities, development departments of States, Pakistan Telecommunication Limited, the Census authorities, etc. By omission, the presumption is that they cannot be data furnishers to a CIB. The reason this is important is that more data means deeper analysis of credit trends and specific geographical location which may need different specialized supports. A broader data base will permit the CIB to commission research to understand such sectoral requirements and also to develop risk assessment models that will provide lender comfort as well as easier access to credit. Recommendation The definition is not broad enough. A CIB should be explicitly permitted to grow its business and enhance its data compilation efforts by seeking out and accepting credit information from the sources not mentioned in Art. 2j.
Part I, Art. 2 l) Definition of credit institutions
a) A credit institution is defined as any banking company or financial institution or non-bank financial company (NBFC). Will a new or existing CIB be considered an NBFC and registered at SECP? b) Why are microfinance banks, microfinance institutions, rural support programs and NGOs excluded from the list of credit institutions?
a) Need clarification on CIB licensing and regulatory status SBP, SECP or none? b) To remove ambiguity, it would be best to define their status within this law.
Part III,
Article 9 says providers of credit info to a CIB
Ambiguity must be
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Requirement to Provide Credit Information
may or may not be members of a CIB and they may or may not be required to submit info to a CIB. However, Article 10 (1) says that once a credit info furnisher is a member of a CIB, then it must supply info to the CIB. Then Article 10 (2) rules out voluntary membership in a CIB, making it mandatory. But Article 10 (3) contradicts this, stating that it is not mandatory for credit info providers to become members of a CIB. Finally, to add more confusion, Article 10 (6) says that if a credit info provider decides not to become a CIB member, then it shall be liable to a fine!
removed or CIBs, existing or new, will not be able to function properly and become financially sustainable. Membership in a CIB should be voluntary with conditions and terms of info supply decided by the members in their commercial interest. Finally, language should be included stating that credit information sharing is permitted between the CIB and MFIs/NGOs, not withstanding The Banking Companies Ordinance, Section 33A subsection 1.
Part III, Article 9 Re Credit Information Furnishers
The definition of credit Information furnisher in Part I Article 2 j) of this Draft is broad enough to encompass non-bank financial companies as well as non-financial companies and bodies. Hence, there is no explicit exclusion of those companies and bodies that are regulated by the Securities and Exchange Commission of Pakistan. Rather they should be included. The broader and deeper the CIBs data base of borrower information, the more effective it is and the better for the market
Recommend that this Article be amended to include a requirement that those entities regulated by the SECP be required to send their customer payment data to a CIB.
Article 12 (1) on power of the State Bank to call for information
States that SBP, given its oversight and regulatory function, may call for any info from a CIB regarding its business. What is missing here is that info from the CIBs proprietary database that is confidential about debtors should be excluded from the info that SBP may acquire. How far does the meaning of business extend? Business
Retaining this ambiguity will cause uncertainty among CIB members and shareholders, delaying financial solvency. This Article must be clarified.
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could be interpreted to include the credit data itself. Article 13 on power of the State Bank to remove directors or management States that if the SBP suspects the CIB is in breach of this Act or if its Directors have taken actions (perceived as) detrimental to the interests of the CIB, then SBP can appoint an Administrator to examine the case. Reasons should be spelled out, e.g., fraud, malpractice, and willful dissemination of confidential information
Article 13 (4 and 5)
States that the CIB must pay for the costs of the investigation (Administrators salary and expenses) and it must reconstitute its board of directors. The language assumes the CIB is guilty of some infraction. The Article does not provide for the case where the allegations are false and no adverse findings were made by the Administrator, in which case the CIB should not pay the costs associated with the investigation. SBP should pay the costs.
Revision required. These powers granted to SBP are too rigorous and excessive.
Article 15 (1b) on the allowable functions of a CIB
Among them are providing Credit Information Intent of this Article Reports to Users and other Credit Bureaus. is unknown; should First, there is no mention here of a CIBs right be clarified. to charge a fee for the Reports, although fees are mentioned in a different context in Article 20. Question: why would a CIB provide its confidential and propriety data to a competitor?
Article 16 (1d) on who may request a Credit Information Report
The section permits anyone who has a Revision and demonstrated need for the information in the tightening needed Report to receive the Report from a CIB. This loophole is too large and could allow unauthorized access to private information. Moreover, it is not defined what constitutes demonstrated need.
Article 17 (1) on the contents of Credit Information Reports
The Article states the kind of credit info a CIB cannot collectany data relating to a Debtor that is not relevant for the purposes of evaluating...the credit capacity of such
More specificity needed on what data is permitted and what are not
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Debtor. Why should SBP decide what is relevant? Since there is no list of the kinds of data that are permitted, a CIB could be penalized for collecting data not deemed relevant by the authorities. Will it be illegal for a CIB to collect info on (i) a debtors marital status or (ii) his directorships? These two examples alone are quite relevant to debt payment capacity because both can generate extra income and repayment capacity. .
permitted, although the language must be flexible to permit commercial decisions by a CIB based on market realities.
Article 19 on deletion of information from CIB Report
Article 19 suggests the SBP will prescribe the number of years that a CIB can retain its private credit information. Why should the government dictate this limit when competition among CIBs in the market will determine what is optimal for their business purposes? Each CIB should be left to determine how long to keep data secure in their records based on their business plan. Maybe they need 20 years retention in order to have enough data to refine their credit scoring model.
This is not an area requiring government oversight. It should be deleted from the Act.
Part VI on protection of consumer
Since there is always the potential for abuse of credit information, the protection provided in Part VI needs to be expanded. For instance, in case of Article 16 (c) & (d), credit bureaus should not be allowed to give credit information of debtors without the prior consent of the debtors. In Article 22, the threshold of liability for disseminating credit info knowingly is too high and should be lowered to recklessness. The consumer protection issues are of special significance to MF customers as they are in a particularly vulnerable position due to their lack of awareness of their legal rights and their possible remedies against potential misdemeanors of credit bureaus.
The Draft Act should contain special and more explicit provisions to govern micro-finance debtors as well as the furnishers of MF information.
Article 20 on disclosure of source of credit information
Article 20 does not permit the free market to determine fees. The article says that a CIB cannot charge more than a prescribed fee for a certain service.
This is not an area requiring government intervention. It should be deleted
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The SBP should not set fee limits. Governments cannot cap fees or interest rates in todays globalizing market economies. If a CIB charges too much for a service, it will lose customers and competitors will gain market share.
from the Act. There is one phrase, however, that should be retained: allowing the debtor to learn the source of credit information on him/her.
Article 26 on exchange of credit information
Article 26 continues the unnecessary interventionist approach to regulation. It says a Pakistani CIB may share its confidential info with foreign CIBs provided that such Company is approved by State Bank. Which government agency here is capable of making such an evaluation and approval? For example, how would SBP know enough to judge the CIB of Croatia or Chile? The involvement of government officials in this area is not a proper use of time and resources (or of taxpayer money).
Government oversight not required. Permission to exchange credit info with other CIBs anywhere should be permitted without pre-approval as long as data transmission is secure.
Part VII on dispute resolution
Amend this article to (a) better protect the rights of the economically disadvantaged and Dissemination of inaccurate information about (b) include provision a micro finance debtor could be economically for an Ombudsman disastrous and would defeat the entire social purpose in the microfinance system. The dispute resolution procedure needs to be revamped in order to cater to complaints made against the credit bureaus by micro finance debtors. Ideally there should be a ombudsman to deal with this issue. banking
Draft Law does not cover these areas sufficiently or at all
1. 2. 3. 4. 5.
The rights and obligations of each of the participants, including the data subject Who will have access to the data and who will not, and under what conditions The obligations, responsibilities and rights of a CIB in the financial system How the accuracy of data will be checked and corrected when necessary How data will be secured against
Additional articles, clearer language or separate laws are needed in these areas
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6.
unwarranted access and kept confidential The ability of CIBs to do joint ventures and/or mergers among themselves without penalty
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SECTION IV. PROSPECTS FOR A CREDIT INFORMATION BUREAU FOR MICROFINANCE

A. Whither the MF Market? Whether the Lahore pilot project will prove fruitful and whether a new MFCIB can take roots and become sustainable from that seed will depend on many factors. Many of them relate to the speed at which demand for microcredit grows and to the capacity of MFIs to reshape their thinking and practices. Participants were asked what in their view would accelerate demand for micro-loans and what could stifle it. A wide range of responses underscored the depth of participant understanding of key variables in the mixture and how many factors were within their control to influence and how many were not. First, what factors or events would make the MF market grow faster? 1. 2. 3. 4. 5. 6. Government Action Continued support of SBP Government support and encouragement of MFIs Less ambiguous and more relaxed regulations Conducive legal and political environment Stable economic climate SECPs requiring that NBFCs send their customer payment data to the MFCIB
Action by MFPs 7. Positive competition among MFIs 8. Raising the share of deposits as a source of funding 9. Better trained human resources at MFIs, capacity building 10. Development of cost effective distribution and delivery channels 11. Better understanding of the dimensions/characteristics of the untapped MF market 12. Designing & offering of diversified products by MFIs according to the needs of clients, including savings accounts, insurance and leasing products 13. Building strong information sharing systems among MFIs 14. Long-term financial sustainability of MFIs 15. Better long-term strategies and policies on the part of MFIs 16. Stronger internal controls at MFIs to maintain organizational efficiency and sustainability 17. Public awareness regarding new avenues to financial services 18. Low transaction costs in providing MF services to clients Other Factors 19. Risk appetite for microfinance amongst commercial banks 20. A breakthrough in technology to reduce costs, increase access, go to remote areas
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21.
Easier access of MFIs to credit lines/ funds, availability of requisite funding
Second, what factors or events would make the MF market grow slower? 1. 2. 3. 4. 5. 6. 7. 8. Government Action Restrictive or uncertain government policies Lack of legal structure for debt recovery High interest rates that stretch MFI sustainability Action by MFPs Lack of skilled MFI staff MFIs with a narrow vision for outreach growth MFIs with unsustainable microfinance programs High delinquency rates Lack of available credit line/ funds for MFIs
These two lists tell us, if nothing else, that the direction of the market and hence the fate of an MFCIB reside primarily in the hands of the principal actorsthe MFPs. They need to take steps to upgrade their programs, plans and MIS/IT systems. They need to approach their business in a more competitive and market-oriented manner. To survive without future donor assistance, they need to rethink their social missions. We take up the matter of donor funding versus self-funding below. A.1. Trends in the MF Market The future of microfinance lending is evolving quite rapidly in Pakistan. There are at least three developments under way. First, commercial banks are looking down market to extend the scope of their lending activities, because (a) the top end of creditworthy corporations and high net worth individuals (only 300-400 clients) has been tapped to saturation while vigorous competition in this sector has narrowed profit margins; and (b) the vast non-banked sector, a large majority of the population, awaits those with the will and wherewithal to capture it but in a cost-effective manner. National Bank, for example, is delving into microcredit. Other large players are moving into the lower end of the consumer market, e.g., Citibank has partnered with Kashf, and ABN is looking for partners. This is positive for the outlook for MF outreach and for the financial sustainability of MFIs. Thus, it is likely that more supply of funds will be available, supported by the second developmentenhanced technology. The old branch-led model of extending ones market by building costly bricks-and-mortar infrastructure is pass in a competitive market with thinning margins. Todays satellite and mobile telephonic technologies reduce a banks operational costs, accelerate transactions and grow the customer base. In another example of avant-garde policy making, SBP is finalizing a new regulation that will permit linkages between banks and telecom operators that will facilitate the
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use of mobile phones in banking transactions, such as the cash-in, cash out business and the use of debit cards. In addition, the Ministry of Finance will soon issue a policy statement encouraging provincial and district authorities to provide consistent tax treatment with respect to mobile banking operations to promote national outreach and entry into rural areas. The use of banking agents in the field will also be permitted, such as retail merchants or the post office, who act as representatives of the commercial banks, speeding transactions at lower cost. Agents can quickly, easily and cheaply intermediate deposit taking and loan disbursement. The mobile phone and satellite technology have already proved themselves in several emerging markets, e.g., the Philippines and South Africa. The use of mobile phone banking (or branchless banking) and banking agents is about to emerge on the scene in Pakistan. An issue to be resolved in this technology-driven shift is how banks can assure they are following prudential know your customer requirements which SBP will not hesitate to insist on. The third development affecting the MF market relates to the source of funding. The current donor funding model of transferring monies from abroad to local MFPs almost irrespective of their profitability is starting to show signs of wear. Donors are rethinking their funding strategies and demanding more commercial results from fund recipients. In addition, the larger MFPs (e.g., Kashf foundation, NRSP) are in the process of graduating to the status of licensed MFBs in order to rely less on external financing and more on deposit mobilization and remittance gathering on their own. This development will likely force the smaller NGOs to exit the market for lack of funds and inability to compete. One wonders how significant NGOs will be in the future if the big ones become MFBs and the smaller ones exit the scene, significantly reducing the demand for donor cash. With these developments the potential for quickly enlarging outreach to those currently without access to financial services is large and appears ready to take off in Pakistan. However, there is still a range of estimates of how large the potential market for microfinance is in Pakistan. B. Donors and Funding We return now to factors affecting the creation and success of an MFCIB in Pakistan. According to a major donor, the GOP wants banks to rely less on external funding from creditors, donors and aid agencies and rely more on internal fund raising so that the local capital market will develop. They want to increase the competition for money and not depend so much on free money, such as soft loans and grants. DFID, USAID, SDC and other like-minded donors are shifting their perspective with regard to funding projects in Pakistan. The inclination now is to downsize, consolidate, wind up, and harmonize their efforts in country. There appear to be too much overlap and too many small programs. The donors also perceive that their money is not being used efficiently (or accountably), so they should reduce them.
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One trend is likely to be a sorting out and consolidation of NGOs. The top tier will become MFBs. The lower tier will drop out or merge as their market share falls due to bigger and better competitors, while the middle tier will try to move up into the top tier or will just barely survive depending on continued donor support. With this development it will be the MFBs who will drive the MFCIB forward, especially when NRSP and Kashf become MFBs themselves. As the same time, if the MFBs undertake aggressive deposit mobilization and remittance intermediation, funding MF loans will depend less on external monies. PPAF will likely survive as an apex organization, but we can expect IBRD, ADB and USAID to decelerate their current programs in this sector. The authorities are fully supportive of this market-oriented trend. The idea is to encourage deposit-taking and local lending in local currencies. The authorities want the local market to provide microfinance financing, not the World Bank. (The Government deems it okay to go to the international market for loans that are used for infrastructure or internal MIS and capacity building. Its just that these funds are not to be used for on-lending, e.g., through PPAF.) As in other countries, non-regulated MFIs and NGOs are not permitted to take deposits and leverage them into MF loans. Instead whatever customer savings MFPs accumulate from customers must be sent to the commercial banks and microfinance banks, which are permitted by law to fund loans from deposits since they are part of the regulated banking system. Illustrating the trend toward rising volumes of savings by microfinance banks is Table 13 covering members of PMN which are the vast majority of MFPs. Table 12 Volume of Savings by PMN Members (000 PKR)
Institution MFBs MFIs RSPs* NGOs Total 2001 0 6,540 696,367 8,854 711,761 2002 0 20,613 912,358 10,592 943,563 2003 392,048 11,860 496,457 94,159 994,524 2004 468,974 8,541 541,869 13,222 1,032,606 2005 679,240 7,894 646,941 20,494 1,354,569 2006 1,772,244 12,230 800,822 25,021 2,610,317 2007e 3,378,625 6,168 1,525,937 23,804 4,934534
Source: PMN
* Of all the rural support programs, National RSP is by far the largest, comprising about 80% of the total volume of savings generated as well as MF loans. SBP will soon issue a license for NRSP to join the regulated formal sector as an MFB. As the table shows, MFBs have rapidly become the largest gatherer of savings.
If MFIs want to earn the right to take deposits to fund their loans, for example to reduce their dependence on foreign donors, then they can join the banking system by transforming themselves into MFBs (after meeting certain capital requirements). The transformation of NGOs and rural support programs (RSPs) into microfinance banks will help to expand the number of institutions that can provide a full range of
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financial products and services to the poor, including savings and deposit services and remittances. Moreover, MFIs cannot continue to rely on donor funding (soft loans and operating grants) or government subsidies if financial sustainability is the goal. Indeed, if the MF sector is to grow and an MFCIB along with it, then MFPs need to be solvent and liquid enough to provide the more liberal terms that MF borrowers want. Specifically, a survey 23 of borrowers revealed that MF borrowers primarily want a larger loan size longer installment periods more flexible terms quicker loan disbursement
It should be no surprise that an MFCIB will contribute to the MFPs ability to provide these features. An MFCIB can assist by reducing MFPs operational costs, i.e., loan approval time and loan recovery time as there will be faster loan decisions taken and fewer delinquencies. If current trends continue, the financial sustainability of MFPs will be achieved increasingly through wholesale financing arrangements, commercial borrowings and/or broad-based savings mobilization rather than via concessional funds. Savings mobilization is the key as it is a highly valued service to poor people. In time, savings can become the dominant source of funds for the MF portfolio. C. Deposits and Funding Deposits in the formal banking system of Pakistan have been rising steadily in this century. Since 2000 total deposits have grown from 1.34 trillion rupees to about 4.9 trillion rupees at the end of 2007, a compound average growth rate of 20%, which is rapid but insufficient given the vast infrastructure and capacity building needs across the country that need to be funded in coming years. Indeed, if Pakistan is to continue its robust rate of economic growth (and reduce its external debt burden), it must rely more on domestic savings. All banks will be encouraged to increase the share of deposits in their funding structure. For MFBs in particular, the need to generate deposits is large given the expected demand for MF loans in coming years. MFBs lend only to the MF sector, so they need to be prepared to gather sufficient deposits and leverage them appropriately if they are to meet the rapid rise in demand for financing at that level, and to reduce their current call on equity and borrowings as financing sources. The table shows in percentage terms how the structure of MFB funding has evolved in recent years and how much more work there is to do to acquire a healthier balance within the structure, one based on the axiom that the business of banks is to make loans sourced primarily from deposits.
23
The Dynamics of Microfinance Expansion in Lahore, op. cit, pp. 20-21.
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Table 13: Funding Structure of MFBs (%) 24

Equity Borrowings Deposits Other liab. 2002 82.7 13.0 2.1 2.1 2003 57.9 31.7 8.9 1.6 2004 45.0 45.8 8.3 0.9 2005 39.6 51.2 8.0 1.2 2006 36.1 48.9 13.5 1.5 2007e 31.5 42.9 23.5 2.1
In 2002, for example, note how heavily MFBs, new to the formal banking scene, relied on their equity to make loans (82.7% of funds available on the balance sheet) and how little on their deposits (2.1%). In the following years, the share of deposits has grown while the share of equity as a basis for lending has declined significantly. The worrisome part from SBPs point of view is that (a) the share of borrowings, often with variable interest rates, has more than tripled as a source of funds, and (b) the domestic capital markets have remained undeveloped. It is SBP policy to rectify this imbalance. In terms of the actual number of deposit accounts with MFBs, they have risen from 2,773 in 2002 to 70,891 at end-2006, or about 125% per annum. However, the volume of deposits has not grown at a comparable rate. State Bank explains why. 25 The majority of people living in rural areas does not have access to bank accounts and are in any case too poor to generate much saving. The high transaction costs and documentary requirements involved deter customers from dealing with banks. Many people find it difficult to provide the required proof of identification, which amounts to a regulatory barrier. Many people find dealing with a formal financial institution is intimidating. None of the MFBs has positioned itself to be a serious deposit-oriented institution.
The asset structure of MFBs conveys a comparable story. Since 2002 MFBs have tended to keep a majority of their assets in treasury instruments rather than in loans. At the end of 2006, 49% of assets comprised government paper, while only 33% were booked as loans. Performance indicators tell a similar tilted tale even with an average net interest margin of 7.7% in the five years through 2006, the operating expense ratios of the six MFBs remained over 90% and return on assets was negative. One unmistakable conclusion from this brief analysis is that if MFBs cannot raise their deposits more rapidly, then the MF sector will not achieve the greater access to finance that government authorities are determined to achieve. The lack of domestic funding will continue to be a constraint on the activities of all MFPs which will hamper their own ability to be in a financial position to maintain lending.
24 25
Banking System Review, State Bank of Pakistan, December 2006, page 77. Ibid., pp. 76, 87.
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In addition to this CIB component of the TA, other components, such as Islamic banking and mobile banking, can help reduce these kinds of barriers, raise access to finance and inculcate a credit culture. The more all these elements combine, the more the outreach will grow. As the outreach grows, the need for an MFCIB grows. PPAF is the prime lending arm for MFIs. Given the trends described above, it is quite possible that PPAFs role as an apex conduit of World Bank funds could decline. In its place State Bank is seriously considering creating a lending facility or special purpose vehicle located at SBP that would take deposits from commercial banks and on-lend them to the NGOs and RSPs. This path will result in a greater volume of funding derived from domestic sources and offered as loans at lower rates (some 250-300 basis points) than MFIs can find elsewhere. However, before taking that step, the authorities should take look at the experience of the Philippines. They offer a different route to the same endwhich is getting low-cost loan funds in the hands of the poor. The Philippines Experience 26 In the Philippines, a microfinance program sponsored by USAID has had substantial successes, e.g., one million loans to 525,000 microenterprises totaling more than $300 million. Quite notable is the fact that more than 80% of the micro-loans provided by participating banks have been funded by additional deposits mobilized by those banks (as opposed to being funded from refinance windows operated by the Central Bank or the Governments Peoples Credit and Finance Corporation.) In the Philippines USAID has never provided a single dollar to participating banks for on-lending. Nor has USAID ever provided a guarantee to participating banks for any of the funds they lend out. All loan funds are the banks own funds, and the banks bear 100% of the risk when lending those funds. MF programs in the Philippines place a strong emphasis on deposit mobilization as a more reliable and less costly source of funds. The conclusion is that the Philippines experience indicates that the better way to expand access to finance at the MF level is by strongly encouraging deposit mobilization on the part of MFBs, not by creating government special purpose vehicles to intermediate the flow of funds to NGOs and RSPs, as some at SBP are suggesting. Moreover, since NRSP has 80% of the portfolio of all RSPs, and since it is to become an MFB soon, only a remnant of the RSP market will remain in smaller weaker hands. Accordingly, by market principles they should be allowed to either improve their financial sustainability, or merge resources, or go out of business, especially if the government is seriously about relying more on domestic funding of liabilities. The future of MF funding in Pakistan is the MFBs. Whatever constraints stand in their way now to mobilize deposits (legal, regulatory, taxation) should be removed by the Government.
USAID, RFTOP 492-08-003, Statement of Work: Microenterprise Access to Banking Services Phase IV, pages 1-2.
26
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D. The Role of Islamic Finance and M-Banking D.1. Islamic Finance Islamic financial products for savers and investors are making inroads in Pakistan as they are throughout the Gulf region. As Dr. Shamshad Akhtar, Governor of the State Bank of Pakistan, stated in February 2007,
Islamic banking is gaining a foothold in Pakistan as SBP has issued licenses to six Islamic banks and allowed a number of conventional banks to offer Islamic window. SBP is working with the industry to promote Shariah compliance regulatory and supervisory framework. While still at a nascent stage, constituting only about 2.3% of industry assets, the growth in Islamic banks has far exceeded the growth observed in larger Asian markets. 27
The Government produced an Islamic Banking Policy in December 2001 to promote Islamic banking alongside the conventional banking industry. A regulatory framework for Islamic finance is in place. Today in Pakistan there are six fully fledged Islamic banks and 13 conventional banks with Islamic windows in their branches. According to the SBP, the total assets of Islamic banks account for about 3.4 percent of market share, Islamic deposits about 3.1 percent, and Islamic financings at 3.3 percent. All of this growth has occurred since 2002. The Governor continues to urge Islamic bankers to extend their services into rural areas. Will the continued growth of Islamic financial instruments affect a credit bureau? At first thought, one might assume that Islamic finance could be a hindrance to the financial sustainability of an MFCIB because it competes with conventional loans and does not fit cleanly into the standard loan contract with monthly repayments and credit bureau processing. If Islamic banks offer customers products different from conventional loans, might this detract from the markets need for credit checks and CIBs? If the market for Islamic financial products, such as mudaraba, ijara and musharaka, absorbs some of the market for standard loan products with their built-in need for a credit background check, this could obstruct a new CIBs growth and even solvency. A closer look, however, alters this picture. Firstly, all Islamic banks in Pakistan make loans mostly backed by collateral, and all are regulated by SBP and all provide data to the eCIB. The Islamic banking system operates in parallel to conventional banking and has the same regulatory system. Islamic banks offer products that are not exactly conventional loans but products that do require regular (often monthly) payments to the bank, such as ijara which is a lease product or a salam contract, which is an advance payment (loan) against future delivery of goods.. If a customer does not meet his obligations under these contracts, then he is in default and the offence is currently being reported to the eCIB. Secondly, it is in the financial interest of an Islamic bank to check on the credit credentials of a potential customer or counterparty before offering a loan or an equity partnership in a project. Islamic financial products such as mudaraba and musharaka
27
Speech in Geneva, 1 Feb. 2007, Banking Sector Reforms: Performance and Challenges, p. 5.
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offer clients/investors an opportunity to participate in a business venture whereby the two parties jointly bear the risks and profits. Islamic financial instruments and products are often equity-oriented, not debt-oriented. Therefore the real questions to consider are these: How does an Islamic financial institution (IFI) determine the track record of a potential business partner? How does an IFI determine if they want to make a sales contract or do an equity participation with a client? On what basis does an IFI decide whether to extend to an individual or business an advance payment on goods to be received in the future? How does an IFI determine whether the person or firm is creditworthy enough to do business with? Isnt some kind of credit check necessary before hand? The answers are that IFIs in Pakistan are obligated to send their loan and other contractual information to the eCIB to join the data pool. These data are processed by eCIB just as the data from non-IFIs. Any IFIs making microfinance loans to the non-regulated sector (NGOs and RSPs) are not obligated to work through the eCIB but they may choose to do so to see a record of the clients past financial dealings. Thus, in practice the eCIB, or any other CIB, is available as a credit check by an IFI, which will not undermine the business of an MFICIB and may even help sustain it. Finally, in Pakistan there are a number of obstacles anyway that face the ready acceptance and quick spread of Islamic financial products: Lack of preparedness among financial institutions to offer products Only a few institutions offering Islamic financial productsonly six full-fledged Islamic banks and 12 commercial banks with Islamic branches. Delays in the roll-out of Islamic products that comply with Shariah and offer business opportunities at the same time. Lack of understanding of Islamic products by the public Lack of public confidence that Islamic banks are actually Islamic No MF Islamic banks serving the MF sector solely, although they may Low rates of saving and deposit taking countrywide The wish of MF clients to just receive credits, to work and to survive, whether the instrument is Islamic or otherwise. Poor people just want to know how much they will owe each month, not caring about the rate of interest or whether it is riba or not. Riba is not taboo in Pakistan anyway. People accept conventional banking.
Conclusion: Even if Islamic finance grows by 50% annually, the industry is unlikely to raise its share of the banking system to 15% in the five or six years, as some IFI supporters claim it will. This pace does not threaten the immediate business or financial sustainability of an MFCIB, especially since the two systems operate more in parallel than in conflict. Islamic finance will take years to gain volume in Pakistan, giving an MFCIB time to grow roots and gain customers. In fact, the market for MF
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credits is so untapped in Pakistan that there is much room for both Islamic and conventional finance and hence room for a CIB to grow in this market. Islamic financial will not be a threat to the need for CIBs as one might initially assume. D.2. Mobile Banking Half the world owns a cell phone or has access to one. Along with this mobile technology comes an enlarging window of opportunity to extend financial and other services within urban areas and out to remote rural areas. Access to finance is limited in Pakistan. One estimate is that only about 16 percent of the adult population use formal banking services. However, mobile phone penetration is much higher: 50 million Pakistanis (30 percent) either own a phone or have access to one. These figures give an idea of the potential of mobile phone and other branchless banking systems to broaden access to financial services quickly. The idea of branchless banking 28 has gained rapid currency in official circles in Pakistan because it offers a very efficient and easy means of increasing access to finance for the poor, the marginal and the non-banked.
Relatively recent technology advances have allowed the cell phone to become a safe and effective transactional device. The widespread and rapidly growing ownership of a mobile phone and the ever increasing geographical coverage of the networks mean that the use of this device has the potential to be able to offer a cost effective and simple means of making financial transactions to service this
largely untapped market. 29
The Governor of SBP supports the expansion of m-banking 30 since it is effective in a) enhancing outreach to un-banked and rural areas because it helps to reduce the cost of delivering financial services, b) relieving pressure on banks to establish a high-cost branch network, and establishing a presence in newer areas, and c) accelerating the turnover of cash which assists economic growth. A good example is the Philippines G-cash model where cash can be deposited or withdrawn. Effect on an MFCIB As with Islamic finance, the question arises for this feasibility study, will branchless banking make inroads into the market for traditional bank financing where credit checks through a CIB are becoming the norm. Will mobile banking (m-banking) undercut the business model of an MFCIB? To determine the answer, we need to ask several questions:
Branchless banking is defined as the delivery of financial services outside conventional bank branches using information and communications technologies and non-bank retail agents. 29 Hoffman, Jenny, Risk Frontier Consultants, Mobile Banking: Implementation Choices, Working Draft, prepared for Fin mark Trust, November 2006, page 2. 30 Akhtar, Dr. Shamshad, Governor, State Bank of Pakistan, Expanding Microfinance Outreach in Pakistan, a presentation to the Prime Minister, February 14, 2007.
28
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Can credits be applied for, approved, and disbursed via cell phone, thereby bypassing the MFCIB? Will lenders avoid the MFCIB in an effort to cut their administrative and processing costs in the low-margin endeavor that microfinance is? Will lenders bypass the MFCIB to build customer volume quickly? Will the volume of inquiry fees received by an MFCIB be reduced or insufficient for financial sustainability?
Several CGAP studies give early indications. According to one of their reports 31, both the bank-led model and the nonbank-led model allow a customer to make loan applications and to receive disbursals from the bank (or retail agent). In such a transaction, the MFCIB might be bypassed, unless the lender chooses to route the applicants information through the MFCIB. Could m-banking permit borrowers to access credits directly from a lender? If so, m-banking could undermine or bypass the market for an MFCIB. On the other hand, MFPs need to assess the risk of lending to previously unbanked individuals who have little or no credit record, few tangible assets to pledge as collateral, and no proof of income. How will MFPs handle the loan appraisal process? They will have to (a) make their own assessment of credit-worthiness based on criteria or models they develop in house, (b) rely on the MFCIB for available information, or (c) partner with other microfinance lenders who are closer to the customer. The fastest and cheapest option is (b), especially if the MFCIB has had several years to build its data base and reputation. Another CGAP study states that the most common type of transaction by cell phone in twenty-one Africa and Latin American countries studied by CGAP are withdrawals, bill payments, money transfers, deposits, balance inquiries, loan disbursements and loan repayments. 32 Significantly for this feasibility study, the CGAP list does not mention loan processing or checking creditworthiness as a function carried out by cell phone. Additional Perspective To acquire further perspective on the link between m-banking and an MFCIB, the consultant contacted experts at CGAP, USAID and the World Bank. Here are their comments received by email in January 2008. As to whether branchless banking threatens the viability (or utility) of a credit bureau, Id say the answer is quite the contrary. Instead, these electronic channels offer incredibly rich customer data that could be useful in making credit decisions.
Timothy R. Lyman, Senior Policy Advisor/CGAP
I dont think that m-banking would undermine the need for a CIB at all. M-banking can facilitate the payment and disbursement aspects of a loan but does not do away
31
CGAP, Use of Agents in Branchless Banking for the Poor: Rewards, Risks, and Regulation, Focus Note #38, October 2006, pages 4,6. 32 CGAP, Using Technology to Build Inclusive Financial Systems, Focus Note #32, January 2006.
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with the need for credit analysis that has to be done up front. Moreover, m-banking has great potential to expand the quantity of client information that is collected by a credit bureau. M-banking basically enables institutions, bank and non-bank, to capture payment information electronically and keep an electronic record for all transactions. All this information could potentially be uploaded to a credit bureau.
Nhu-An Tran, Microenterprise Development Advisor, USAID
I don't think m-banking will reduce the need for CIBs at all. The mobiles will just process transactions but won't automate credit decision-making. They move data, but don't crunch it. In other words, think of the mobile as a replacement for a debit card and card reading terminal. What m-banking will do, just as cards have done, is create a whole bunch of electronic transaction records that can be analyzed by banks and scoring companies to determine spending / savings behavior and determine creditworthiness. So rather than replace a credit bureau, m-banking should be a source of data about customer financial behavior.
Gautam Ivatury, Manager CGAP Technology Program
I completely agree with Gautam that the CB will even become more important with the use of electronic transactions. They will be able to offer more products to local lending institutions and other companies since they will have access to the wealth of transactional data which should have some predictive power about clients' repayment capacity and creditworthiness.
Hannah Siedek, CGAP
Conclusion: M-banking will permit borrowers to make financial transactions directly with financial institutions without their physically going to a traditional bank branch, which is very time-consuming in rural areas where there are not many branches (or paved roads) to begin with. However, no matter how pervasive m-banking becomes, the lender will still need (or have the choice) to make a credit check before he sends funds to the recipient. Cell phones are just transmission lines and facilitators in a transaction, not decision makers. In essence, branchless banking is a new distribution channel for finance; it does not bypass financial intermediaries such as CIBs. The borrower on his cell phone will not interface directly with an MFCIB, just with the lenders or their agents. Any acceleration in lending and borrowing activity facilitated by cell phone should not affect lender interface with the MFCIB. The creditor/members of the MFCIB will use a separate means of connecting with the MFCIB, that is, via secure, password-protected, firewalled and internet-connected channels. Thus, the advent of m-banking should not sidetrack efforts to create an MFCIB or threaten its commercial success. While the use of mobile banking in Pakistan is going to grow rapidly in time, it will not threaten the need for an MFCIB and may
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even enhance its value as m-banking will permit the deepening and broadening of the MFCIB data base. E. The Role of SBP in an MFCIB What role, if any, should the SBP play in creating, enabling, regulating or running an MFCIB? Those interviewed offered differing views on this subject. E.1. The Majority View. A majority of those interviewed expressed the view that the SBP should facilitate the creation of an MFCIB, but not own it, run it or regulate it. Facilitating was defined as enabling or mandating an appropriate legal and regulatory environment that facilitates information sharing and offers incentives. Incentives mentioned included a targeted startup subsidy for fixed costs, grants or tax exemptions until the CIBs financial sustainability is achieved. The argument was that SBP has tried various MF outreach projects in the past, such as the Agricultural Development Bank, and has not had much success. Finally, although the SBP certainly has the power via ordinance to broaden its current eCIB function to cover microfinance, it should instead permit the private sector to more efficiently run a CIB. Other comments arose in the interviews that supported this position and pointed to current problems with eCIB, problems that might be exacerbated if the eCIBs mandate was extended further into the microfinance sector. The eCIB server is down more than it should be, and it does not sort incoming data well for errors. There is only once-a-month reporting, so a borrower could take out a loan on the 16th of a month and it would not show up for another month when it is reported to eCIB. There is no mechanism in place for borrowers to access their own credit information or to correct errors in the file. Moreover, if there is a dispute over the data on file, there is no legal process available to investigate and settle. The question arose, how can the SBP be both the operator of a credit bureau and its regulator? Those that run the eCIB are not responsive enough to complaints and inquiries from users. The eCIB help desk has not materially improved matters. This situation hinders financial institutions in the smooth functioning of their services and their ability to respond to client needs rapidly. Training staff at the regulated financial institutions in the use of the eCIB software was insufficient. In fact, further training is in
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demand as officers who attended earlier trainings have been replaced, and no formal training procedure for new personnel at the banks exists with regards to the eCIB. Current regulations prevent financial institutions from learning from eCIB which institutions have made loans to a customer and which loans from which institutions he has defaulted on. Moreover, FIs are not told a borrowers total liabilities to better judge creditworthiness. Although eCIB maintains both positive and negative payment information in the data base, its output (the creditworthiness report on a debtor) only reflects the borrowers status of default over the past twelve months. Information on any loans which were previously defaulted on but later cured by the borrower are not visible to the lender. The consequences are
There is no incentive for borrowers not to default on loans since once their defaults are cleared, there is no adverse report on their performance; Financial institutions do not receive a complete picture of borrowers credit history; hence loan defaulters may still not be precluded from receiving loans as long as they have settled earlier loans.
E.2. The Minority View Several of those interviewed held the view that there would be an advantage in having the SBP run a MFCIB because their data are more voluminous and authentic, and the infrastructure is already in place. The eCIB has the technical capacity to broaden the function to cover microfinance. In addition, SBP is highly respected and possesses the authority to expedite the process through suasion and ordinances. If SBP would make data submission to the eCIB mandatory for NGOs and non-banks as well as for regulated financial institutions, then the whole process could be expedited. Similarly, from a broader perspective the SBP derives a number of necessary benefits 33 from running the eCIB. o It enables supervisors at State Bank to more accurately evaluate credit risk in financial institutions and monitor their portfolios o The data can be used to identify questionable or poorly performing loans to be reviewed during periodic onsite examinations o It can identify economy-wide trends. E.3. Best Practice. How does one decide between the two viewpoints? The answer is to refer to international best practice. This section explains both general and specific reasons
33
Banking System Review, State+ Bank of Pakistan, December 2006, page 98.
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why public credit registries (PCRs), that is, CIBs owned by the government, are not positioned to offer best practices in credit bureau functioning. Evidence from around the world shows that PCRs use the data sent to them to monitor systemic risk and to assure that large banks are not in danger of collapse which would threaten depositors and financial system contagion. PCRs are not designed to distinguish good and bad borrowers at the micro level. Actively helping commercial banks to reduce their loan losses is a diversion of resources and raises clear issues of moral hazard. There is a widespread consensus on the part of economic development experts that when the state plays a major role in allocating resources, supplanting decisions of the private sector, then the results are most often a chaotic incentive structure, the unleashing of rapacious rent seeking and the diversion of resources. 34 The days of the interventionist state are over, and the World Bank acknowledges this with its conditionality loans. Moreover, experience has shown that PCRs have two other potential disadvantages: First, public sectors everywhere are impeded by the usual constrains of trying to recruit and retain the best technical expertise. As a result, technological innovation at PCRs is usually slowed down as the best experts are drawn to the private sector. Second, in cases where the cost of operating a PCR is not fully recovered from fees from users, the result is that the central bank is subsidizing a sector that does not need subsidies. In early 2006 Pakistans Commerce Minister expressed his view of the governments role in business 35: The governments work is not to do business, but to be a facilitator through friendly policies and a provider of market access to local businesses. This assertion is a clear statement of modern policy that coincides with World Bank and IMF practice and the consultants view. More specifically, when governments intervene in the financial sector, other than to ensure system stability, the usual result is to reduce incentives of the private sector involvement. For example, microfinance practitioners in Latin America find that traditional government-run programs tend to hinder more than help the [MF] industry. 36 CGAP, the respected MF organization, has developed eleven Key Principles of Microfinance which have been endorsed by CGAPs 31 member donors, and further endorsed by the Group of Eight leaders at the G8 Summit at Sea Island on 10 June 2004. MF principle number eight applies here:
The role of government is to enable financial services, not to provide them directly. National governments should set policies that stimulate financial
34 35
Aftab Ahmad Khan, Role of institutions in economic development, The News, November 12, 2007. Commerce Minister Humayun Akhtar Khan, speaking at the launch of the Karachi office of the Center for International Private Enterprise, January 19, 2006. 36 Peter Bate, Governments in Microfinance: threat or opportunity? Microenterprise Americas Magazine, Fall 2007, from the Inter-American Development Bank website.
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services for poor people at the same time as protecting deposits. Governments need to maintain macroeconomic stability, avoid interest rate caps, and refrain from distorting markets with subsidized, high-default loan programs that cannot be sustained. They should also clamp down on corruption and improve the environment for micro-businesses, including access to markets and infrastructure. In special cases where other funds are unavailable, government funding may be warranted for sound and independent microfinance institutions.
The Asian Development Bank in its Report relative to this TA stated that statutory institutions that are created as development vehicles are at risk of being influenced over time by other priorities or agendas of Government, even when the shares of the institution are majority held by the private sector. 37 A CIB is a development vehicle in the sense that its operation will hasten the extension of financial access to the poor. Partial government ownership of credit bureaus is rare, and only a few countries follow this model 38. For instance, in Sri Lanka, the Credit Information Bureau is a public-private partnership in which the central bank holds a 49 percent equity stake. The central bank, however, plans to eventually divest itself of its shares in the bureau. As the GOP has shown repeatedly by privatizing banks and opening the economy up to market forces, the authorities realize that the state does not belong in commercial businesses or in owning entities in the financial sector. The latest evidence is the anticipated restructuring and privatization of First Womens Bank and Khushhali Bank. The MFCIB would be another welcome bit of evidence. The Government of Pakistan, led by SBP, has made exceptional steps in recent years in improving the market economy and its institutions. The Governments target for financial inclusion is to halve the poverty headcount by 2015. The GOP has made a number of positive policy and regulatory steps in that direction, but implementation and private sector buy-in have been tardy. The target is very unlikely to be reached. The principal hindrances to reaching the target have been general conditions such as an inefficient public administration, popular indifference, political uncertainty, and perceived official corruption. The rather persistence nature of these conditions is another argument against non-state ownership and management of a CIB. It will take a commercial entity to mitigate these circumstances. Project implementation capacity remains weak in Pakistan, as the ADB stated in an October 2007 report which cited lack of qualified technical staff, poor accountability, and a complex decision making process as reasons for perpetual delays and cost overruns. There are deep-rooted inefficiencies afflicting the public sector. One
Report and Recommendation of the President to the Board of Directors, Proposed Loans and Technical Assistance Grant: Islamic Republic of Pakistan: Improving Access to Financial Services (Phase I) Program, November 2006, page 14. 38 Credit Bureau Knowledge Guide, IFC, Washington D.C., September 2006, page 10.
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clear conclusion is that it is best to leave the development of an MFCIB in private hands. The consultants opinion is that the majority viewpoint expressed above would be more efficient in the long run and more consistent with international best practice. Despite this consensus among CIB experts about non-interference in the business of credit information, there is a role for the state sector and for SBP in particular to play in the orderly development of a credit reporting system. As determined by experience in other countries, the following tasks are appropriate responsibilities for government to undertake.
Taking a lead in policy decisions on CIBs Championing the legislative endeavor Registering or licensing credit bureaus Providing legal and supervisory oversight of CIBs Offering a venue for dispute settlement or dispute settlement mechanism Encouraging participation through regulatory requirements Ensuring that the law has clear legal provisions to override secrecy restriction Making regulations on data collection, data dissemination to ensure their security Passing an ordinance for consumer privacy and protection Imposing sanctions and penalties for unauthorized data dissemination or misuse Allowing borrowers to access credit reports at a fair price Prescribing clear procedures to challenge and correct incorrect entries Creating a balance between privacy protection and effective information sharing
For SBP, the gaps in the legal and regulatory framework should be filled and ambiguous elements clarified. The Draft Credit Bureaus Act 2007 is a move in the right direction. (See Section III d above.) As the list above suggests, SBP should use its influence and authority to promote publicity about the new arrangements so that trust can be generated. Regulations should include reasonable penalties for unauthorized use of client financial data. What we do not recommend is the command approach, that is, requiring credit providers to obtain credit reports from a CIB prior to their granting any credit. While some countries still use this tactic to jump-start the CIB process, it is not a longterm best solution. Our view is that private CIBs are comprised of voluntary members who (a) may choose not to access the CIBs data base for information on certain loan applicants, and (b) must do their own due diligence with regard to credits and not wait for what they might perceive as a stamp of approval from a CIB. As neutral data providers, CIBs do not engage in loan processing. F. The Options for a New MFCIB Before narrowing the choices for the type, ownership and funding of an MFCIB, it will help to step back and examine the contemplated entity from a SWOT standpoint. What are the strengths, weaknesses, opportunities and threats facing an MFCIB? By weighing each factor, we can determine the optimal direction to go. Table 15 illustrates these various dimensions.
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The main strength underlying the creation of a new MFCIB is the clear support of a credit bureaus major constituenciesthe lenders (MFPs), the industry association (PMN), the regulators (SBP and SECP), and the international donors (ADB, DFID). The main stakeholders agree that the timing and market conditions are right. Offsetting these strengths are several major weaknesses: an MFCIBs questionable commercial sustainability given problematic revenues; inaccurate and incomplete data on MF borrowers; and varying states of MIS mismatch among users. However, as long as the participants are willing to persist with market solutions, these weaknesses can be overcome in time. An MFCIB offers Pakistan the best opportunity in decades to extend access to finance to the poorer regions of the country and thereby facilitate a reduction in poverty. To date other attempted means (development finance, directed loans) have not worked. The main threats to the whole process are an uncertain legal environment, delays in the MFCIBs reaching commercial success, and matters of funding the MFPs (domestic savings generation versus international donations and grants). As with the weaknesses mentioned, these threats can be overcome in time with patience and determination on the part of stakeholders. The policy environment, a major roadblock in many countries, is appropriate and accommodating in Pakistan. Given all the opinions expressed in the interviews and cognizant of international best practices, what are the practical options for creating an MFCIB that take into account cost, timing and partnerships? Table 16 lists five options running the spectrum from extending eCIBs mandate over non-regulated MFIs, to creating a new private credit bureau, to aligning with an established international partner. The table lists the pros and cons of each option.
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Table 14: SWOT Analysis for MFCIB
Strengths 1. Strong support from MFPs and PMN 2. Market conditions are right 3. Likely financial support of donors (e.g., training, IT upgrades) and tax authorities 4. Support of State Bank highly likely from policy standpoint 5. Both seed capital and one-off subsidies will be quite modest and initial capital should not be difficult to find
Weaknesses 1. If MFIs are not financially sustainable, then fewer inquiries to MFCIB will result 2. Commercial sustainability of MFCIB is questionable, given low inquiry fees and uncertain demand 3. Perception among many MFIs and MFBs that microfinance is a poverty alleviation tool, not an independent business 4. Foolproof individual ID lacking; inaccurate data gathered in differing formats 5. Reluctance of some MFIs to share their information with others 6. MIS/IT systems of participants in dire need of upgrading and integration; lack of compatibility of branch and HQ MIS 7. Unreliable physical infrastructure, e.g., landlines and electricity 8. Insufficiently trained human resources
Opportunities 1. To significantly expand outreach to financial services in Pakistan 2. To be trendsetter in the region, maybe first MFCIB in an Islamic country 3. To fill a necessary gap in financial sector infrastructure 4. To help generate economic activity and bring borrowers and taxpayers into the formal sector
Threats 1. Gaps in the legal/regulatory environment 2. Low inquiry fees will delay break-even 3. Unpredictable donor funding of MFIs or even dwindling support 4. Commercial bank inroads via ICTs (information and communication technologies), thereby reducing processing costs and the need for a credit check through MFCIB 5. The uncertain political environment which could delay policy decisions, dampen loan demand, and reduce CIB inquiry volume
Table 15:
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Options for a Microfinance Credit Information Bureau

OPTIONS
I. Expanded role for eCIB: a) Extend scope to cover non-regulated microfinance sector; b) Upgrade eCIB MIS and database and then privatize
ADVANTAGES
1. Has largest borrower data base & infrastructure in place 2. Faster to extend scope of coverage via regulation than starting a new MFCIB 3. A respected institution 4. One large CIB for all financial sectors 5. Mega CIB becomes commercial enterprise with faster up-grading, better management (option b) 6. Legal roadblocks can be removed by SBP ordinances 1. Data input / output more relevant and focused for MF 2. Will meet NGO-RSP needs better 3. Best option if donor funds provided 4. Private sector more innovative 1. PMN knows sector best; will have member buy-in 2. Can audit quality of data 3. PMN in favor of capacity building role and PMN members will welcome it 1. No legal hindrances 2. Will have market niche in non-regulated sector 3. Commercial and innovative dynamism 4. No need for new institution 5. If no donor funds, then this is best option 1. World class CIB for Pak. 2. Fastest option
DISADVANTAGES
1. Neither legally possible nor best practice 2. Not SBPs mission to engage in non-regulated sector 3. SBP not interested or committed to either a) or b) 4. eCIB Inquiry fees too high for MFIs 5. MFIs info needs differ from those of regulated banks 6. Checking data quality not a priority at eCIB 7. MFIs dont want their autonomy compromised 1. Much cost & time needed 2. MFBs have to pay twice as members of eCIB too 3. MFIs likely not willing or able to submit data 4. MFCIB cannot take advantage of data at eCIB 1. PMN not interested in becoming a CIB itself 2. PMN is lean organization with limited capacity itself 3. PMN may no longer be perceived as independent 1. Those with competitive advantage not in favor 2. Huge untapped MF market will deter merger in near term 3. May be too ambitious for PMN
II. Create new private standalone CIB for microfinance sector only
III. Expanded PMN role: a) MFI capacity building, b) Forms an MFCIB as subsidiary of PMN IV. Joint ventures a) Business link among existing private CIBs, b) PMN makes business and data-sharing link with private CIB(s), c) MFIs/NGOs make deals with private CIB(s) V. Invite an international CIB to set it up
Most costly but doable (and perhaps preferable) with donor funding
Based on legal feasibility, best practice and the preferences of PMN and other stakeholders, it is clear that option IV (joint ventures) is the best path to take. PMN
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began exploring this option in February 2008 with the intention that the pilot project will turn into an actual MFCIB. PMN decided that the other options shown take too much time and cost too much money and do not ensure state-of-the-art technology for information gathering, collation, storage, confidentiality and retrieval. G. Financial Projections Even if option IV is the most practical choice, a national MFCIB may still not be financially feasible over time without (a) assistance from the public sector, such has a targeted subsidy, (b) financial support from donor agencies, or (c) relatively high inquiry fees. High fees (e.g., more than PKR 30) will likely be prohibitive given that most MFPs either cannot afford them (NGOs) or are already paying inquiry fees to eCIB and/or one of the private CIBs (MFBs). To be attractive to microfinance providers, the cost of accessing information from credit bureaus needs to be affordable. However, if the fees are too affordable, then the CIB will not be able to sustain itself financially. Fees derived from inquiries from MFPs will be the main source of MFCIB income (at least until other products are developed). Annex D shows a hypothetical projection of profit and loss for a countrywide MFCIB based on three different fee scenarios: PKR 20, PKR 40, and PKR 60. The earliest full year of operations would be 2009, but the tables describe the timeline merely as Year 1, Year 2, etc. Assumptions Here are the assumptions underlying the forecasts in Annex D: 1. The initial capital investment is assumed to be approximately USD 443,000, including USD 300,000 for technical assistance in years one and two to set up and synchronize the data flows within and among participants. The TA may come from domestic or international companies that specialize in this field. The remaining investment comprises office furniture, hardware and software. The total investment is shown as a one-off fixed cost since it will occur before the CIB is actually experiencing operating costs. The fixed costs are amortized over five years at USD 86,610 per year. 2. The number of inquiries to the MFCIB from MFPs relies on PMN historical data and forecasts. Assuming the number of new MF borrowers nationwide will rise by 664,000 during 2008, the year will end with 2.14 million active borrowers (new plus existing) across Pakistan, up from 1.45 million at the end of 2007. 3. Virtually all of this pool of 2.14 million borrowers will have a credit record on file or personal data collected with one or more of the MFPs. To estimate the number of inquiries from MFPs to the MFCIB regarding these borrowers, PMN and the consultant made conservative assumptions. 4. Inquiries on the expected new borrowers (664,000) will be focused in those regions of the country where the MF market is saturated and the greatest overlapping of clients occurs. We took the top 15 districts in the country where
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outreach is greatest and competition is most intense (such as Lahore with 13 MFPs competing and Faisalabad with nine MFPs competing). These 15 districts will alone provide half the new nationwide clients, but we assumed that only half of these (165,938) would be subject to inquiries, which is only one fourth of expected new borrowers nationwide. We could have assumed that all new borrowers would face an MFCIB inquiry but did want to skew the outcome in an optimistic direction. 5. With regard to the two million existing borrowers, we again took only the top 15 districts (comprising one million existing borrowers) and then assumed that MF lenders will not inquire to the MFCIB about all of them because their payment performance already exists in the data bases of the MFPs. Many of these existing clients will be repeat borrowers from the same lender; hence, we assumed that only 10 percent of them (100,000) would change lenders or shop around, which would generate an inquiry. 6. Combining the estimates of both new and existing borrowers about whom inquiries would be made, we arrived at a total of 265,938 inquiries during the first year. Thereafter, we assumed that inquiries would grow, not at a steady annual rate, but at a faster rate each year as the value of the MFCIB became known. The rate of increase in total inquiries was 25% in year two over year one, 35% in year three, 45% in year four, and 55% in year five. 7. The first pass at spreadsheet analysis had assumed (a) that inquiries would total about half the set of existing and new MF borrowers (or one million). Also, inquiry fees for each scenario were initially set at rates that stakeholders declared appropriate during the interviews, namely five rupees, ten rupees and twenty rupees per inquiry. However, upon application these rates were too low to generate any breakeven, even with the high level of paid inquiries to the MFCIB that was assumed. 8. Therefore, for a second pass, the consultant decided (a) that the number of inquiries should be set realistically much lower {see #6 above}, and (b) that if the MFCIB is to survive as a viable commercial entity, it must charge rates closer to market levels. We chose 20, 40 and 60 rupees per inquiry as more realistic and competitive with other CIBs. MFPs may be reluctant to pay these rates initially, but the value added by each inquiry should allay concerns over time. 9. The costs displayed in the spreadsheets assume the MFCIB is a privately owned limited company paying market rates for salaries and rent. Wages for the staff of six make up almost half of total operating costs. Staffing normally depends on the workload, which itself is a function of Number of existing and potential subscribers. Number of branches/workstations connected to the bureau Inquiry volumes. Projected and actual database size. Growth plans for the bureau.
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Complexity of operations (e.g., need for offline checks or updates overnight or on weekends).
10. We kept the number of staff steady over time, despite the growing number of inquiries, assuming that once the proper software is in place, it will have the capacity to handle many more times the inquiries assumed at the outset. To the extent this assumption proves unworkable, staff costs will rise, directly impacting the bottom line. On the other hand, if the MFCIB decides to collaborate operationally with an existing CIB in Pakistan, then staff costs could even be lower than shown. 11. Operating costs rise by 13% per year, which is an average of expected CPI inflation over the next five years. For purposes of simplicity, the inflation rate and foreign exchange rate (USD 1.00 = PKR 64) were held constant during the fiveyear forecast, even though both are expected to deteriorate and fluctuate from current levels. If the inflation rate rises in the next few years, then the cost of wages and all other expenses (utilities, rent, supplies, etc.) will be understated in the spreadsheets, and both breakeven and profitability for the MFCIB will be delayed. If the rupee loses value over time, e.g., USD 1.00 = PKR 66 or 67, there will be further inflationary pressure nationwide. Results What results do all these assumptions yield? In the first case at twenty rupees per inquiry, the MFCIB does not achieve profitability at all during its first five years. In fact, its losses grow over the five years to a cumulative USD 1.42 million, which is unsustainable. A major offset to this type of bleak future would be if the MFCIBs initial capital costs (USD 440,000) were covered by outside investors or donors. Or, if a donor or investor would supply USD 1.85 million at startup that would cover the first five years anticipated operating costs, bringing the bureau to operational surplus in the first year. In the second case at forty rupees per inquiry, the financial situation improves as one would expect, holding all other variables constant. The MFCIBs losses are lower, and operational breakeven occurs late in year four. Paying off the proportion of fixed costs delays pre-tax profitability another year. Thus, in year five, assuming no initial subsidies or grants, pre-tax net income turns positive at USD 95,670. In the third case at sixty rupees per inquiry, the higher fee level and inquiry volume bring operational breakeven even further forward, achieved early in year three. Years four and five show a rapid growth in profitability which we can assume would accelerate once the fixed costs are fully amortized in year six. The conclusions one draws from the spreadsheets are clear: 1. It is critical that the members of any MFCIB initiative, such as the Lahore pilot project, discuss the options and reach a consensus on the level of equity contribution from each member, the level of annual membership fees (if any), and the size of inquiry fees. A simple egalitarian solution would be for each
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member to pay the same membership fee and equity contribution, giving all an equal voice in decision-making. A more complex but perhaps more equitable solution would be for members to pay these two amounts according to the size of their loan portfolio, which would give more voting authority among shareholders to the largest MFPs. In any case, presumptive members and shareholders of an MFCIB need to discuss all the options based on the results of varying the assumptions in the spreadsheets. 2. The MFCIBs financial results depend heavily on two variables: the number of inquiries made and the level of the fee charged. As the number of inquiries rises, operational costs are dramatically lowered and the operational breakeven point is brought forward. If the volume of inquiries should exceed our assumption of one quarter of new borrowers, then the pro forma P&Ls shown in Annex D will show positive financial results sooner. . 3. The implication for the MFCIBs business strategy is clear: focus on marketing the service so as to increase inquiries and you will reach sustainable profitability much sooner. In this regard, the organizers of the MFCIB pilot project should follow through on the openness of the SECP and PPAF to consider mandating that their respective memberships must provide loan data to the new CIB, a circumstance that would guarantee its starting business with a deep data base. (See section III B above.) 4. To gather momentum, earn credibility and ensure sustainability, it is important that the MFCIB show positive results for members and investors. That means that revenues must demonstrate a steady increase over time and that net income must be positive as soon as possible. There are two ways to guarantee both outcomes: (i) If the credit bureaus operating costs are completely covered by donors or investors for the first few years so that fees can be kept low enough to generate growing demand for its services, or (ii) If members and/or shareholders supplied the initial capital investment of $443,000 which would lend public confidence and standing to the new institution and ensure that state-of-the-art hardware and software are installed without delay. Another issue is whether membership in the MFCIB should be compulsory or voluntary. Should all MFPs be required to be shareholders and/or contribute data to the MFCIB? Some respondents argued that it should be compulsory so that the data base will be large to begin with. Others said it should be voluntary because that will promote better cooperation between members and the CIB. Others suggest a compromise, i.e., make it voluntary but offer an incentive to MFPs to join, such as donor grants to upgrade their MIS. Best practice suggests that membership should be voluntary, especially if (a) there is a membership fee involved (say $10,000), and (b) the MFIs with the largest market
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share in micro-credits are willing to participate at the outset. Over time as the CIB gains credibility and members show improved performance in their loan portfolios relative to non-members, other MFPs will have an incentive to join with no coercion. Table 17 lists the pros and cons of each approach.
Table 16: Should Membership in a MFCIB be Voluntary or Mandatory?

PROS
Mandatory membership 1. CIB will grow faster and will be viable sooner 2. Dont need government ordinance 3. PPAF can condition future funding on its members joining the MFCIB 4. Can permit MFIs to quit MFCIB after x years if not satisfied. 5. Can be coupled with donor promise of MIS upgrades 1. Only need top 5-6 MFPs who cover 85% of MF market to commit and join, all with relatively good MIS already 2. This option more in line with best practice
CONS
1. MFBs may object to having to pay two fees, one to MFCIB and one to eCIB 2. Willingness to join based on incentives, which is a better approach for cooperation
Voluntary membership
1. Size, depth and quality of CIB data base could be limited at outset 2. May take longer to become commercially sustainable
H. The Lahore Pilot Project In mid-2007 44% of total microcredit outreach in Pakistan was in urban areas. As the urban areas are growing rapidly, it is expected that microfinance outreach will also expand commensurately with urban clients, thereby achieving a majority share of MF loans in 2012-2013. The most notable area where urban growth has been concentrated is Lahore, the second largest urban center in Pakistan. Microfinance outreach in Lahore stood at 169,000 active clients at the end of 2007, which means an average growth of 8% every quarter that year. Even with this rapid growth in outreach in Lahore, it is estimated that less than 15% of the MF market there has been penetrated. New pro-poor lending institutions continue to enter this market, exacerbating the challenges existing MFPs already face. (See Section II C.) Some of the emerging issues are 39: 1. MFPs encroaching on others areas of operation, 2. A rising incidence of multiple borrowing among clients of different MFPs, and 3. MFP poaching of clients and employees. Unused to such competition, the MFPs in Lahore found their near monopolies at risk and chafed under the new conditions caused by a natural evolution of the market.
39
The Dynamics of Microfinance Expansion in Lahore, op cit., page 1
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With the growth of demand for MF services (primarily group-based credits) and the proliferation of MFIs to serve that market has come the natural offspring of a freewheeling and institutionally undeveloped marketunsavory practices by some MFIs to gain market share and to recover delinquencies. A number of MFIs have hired commission agents who use strong-arm tactics to collect cash and clients. For their part, knowing that the MFPs cannot determine anyones total indebtedness, borrowers have skillfully (according to some) and out of necessity (according to others) taken up multiple borrowings from different providers. The supply of credit is accessible so why not avail oneself of it, they reason, especially if they need a larger loan to buy a productive asset (e.g., rickshaw or buffalo) than a single MFP is willing to extend, or if the crop season is late, or if wedding or funeral expenses are impending. Two features lacking in the competitive Lahore-based MF lending are price reductions by MFPs to gain clients and product diversification to meet different market segments, both of which are normal responses to competition in a market economy. Various reasons for the lack of such have been suggested: The social imperative drives lending, so pricing and profit are secondary The donor-dependent MFPs are somewhat indifferent to financial results as long as the funds keep coming and the balance sheet keeps growing. Profit margins are so thin that the MFPs cannot afford to reduce their revenue. In any case, when predatory tactics and practices became threatening to MFIs, they carried their concerns to PMN. The solution was to create an embryonic MFCIB in the shape of a pilot project to share debtor information. The intention is to (a) alleviate some of the credit risk the MFPs experience by making loan applications and approval systems simpler and more dependable and disbursements quicker, and (b) identify a loan applicants current status in terms of outstanding debt with other MFPs. Ideally such a system will not only allow MFPs to screen out multiple borrowers (if that is the policy line they wish to take), but also to choose to provide multiple loans to a single client if they are able to assess the risk in each case. The PMN/Shore bank study referred to several times above concludes succinctly 40:
Information systems, including a credit bureau, for sharing client credit status/history between MFPs can help track (if not minimize) the risk to an MFP from multiple borrowing. In doing so, it can supplement MFPs internal control systems and balance the observed increase in risk as competitive pressures begin to favor client preferences against risk management principles, and clients discover increased opportunities for parallel borrowing from multiple organizations.
Table 17 shows a sample of the MFPs active in Lahore who has joined the pilot project. The leaders among them are Kashf Foundation, First Microfinance Bank
40
The Dynamics of Microfinance Expansion in Lahore, op. cit, page 26.
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and Tameer MFB, all of whom have publicly stated their willingness to commit resources to the project and all of whom sit on PMNs Policy Board. The large MFPs (Kashf, Khushhali and NRSP) capture 85-90% of the MF market in Lahore, so they need to be active participants, if not investors, in the pilot project. One can see that the growth rate of active borrowers over the 2002 to 2008 period is rapid, some MFPs doubling their client base each year. It is this brisk growth that has prompted the concerns mentioned above, as well as rising portfolios at risk since 2006 (Table 1). In terms of performance, the one disappointment evident in the table is Khushhali Bank. It is the largest MFB (with 1/3 of the microfinance market in terms of outreach) and has privileged access to donor funding, but it is showing the slowest growth among active borrowers.
Table 17: Sample of MFIs Active in Lahore Participating in PMNs Pilot Project
Number of Active Borrowers* Nationwide MFI 2002 2003 2004 2005 2006 2007 2008f CAGR** 280 833 3,039 6,182 8,894 10,194 12,500 88.4% Akhuwat 3,848 6,407 12,512 24,692 39,000 78.4% Asasah 5,956 10,140 6,980 15,044 25,478 32,627 33,652 33.5% DAMEN 9,641 17,088 52,679 102,604 200,000 113.4% First MFB 29,655 59,418 63,325 75,520 135,797 295,275 500,000 60.1% Kashf 168,105 227,172 236,917 381,000 424,000 26.0% Khushhali Bank 18.9% PRSP*** 30,122 40,990 54,555 47,855 42,959 67,285 85,000 20,035 27,226 100,000 123.4% Tameer MFB
* Active Borrowers = the number of borrowers with loans outstanding. ** CAGR = compound average growth rate (a smoothed annualized increase) *** PRSPs data reflect June 30 of year shown; the other MFPs shown use a calendar year
Matters to Address With the PMNs decision to start a pilot project in Lahore, there are important matters to address, matters of organization and implementation. The project must be designed, staffed and funded. There must be a memorandum of understanding for the members, codes of conduct for the MFCIB staff, and privacy firewalls at the MFCIB to assure confidentiality. All this will require international TA beyond the scope of this current project. Creating a new institution based on cooperation and trust as well as mutual financial benefit always raises a number of issues. Assuming PMNs intention is for the pilot project to be the kernel of an MFCIB, the following matters must be addressed by participants at an early stage: What are the rights and obligations of members?
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Who will the shareholders be? Who should manage the company? What will the legal status be? What is the best way to build and protect the data base which is the largest asset? Who will write the marketing plan and business plan? What should membership and inquiry fees be? How will the operating expenses of a new CIB be covered for the first few years? What level of capital will assure growing room for the new entity? How quickly and cost-effectively can all the participants IT/MIS systems be integrated? Who will monitor that the basic principles of a CIB are followed (See Annex B.) To cope with all these issues and to gather the best ideas in the financial sector, PMN is issuing a Request for Proposal to the private CIBs in Pakistan. The RFP will ask the CIBs to provide PMN with a proposal for starting and operating a CIB to cover all the MF market. The resulting proposals can be evaluated for substance, cost and timeliness. Some form of information sharing or software leasing or joint venture may emerge. This outcome would be consistent with Option IV in Table 14, which is the approach recommended here in this report. Experience in other countries and jurisdictions should be examined for best practice and to avoid mistakes in starting up and in continuing operations. As an illustration, In October and November 2007 the Centre for the Study of Financial Innovation undertook a global survey on microfinance and received 305 responses from 74 countries and multinational institutions regarding the current and future risks facing the MF industry. .Their subsequent report 41 offers insights for all MF stakeholders.
Biggest risks today 1 Management quality 2 Corporate governance 3 Inappropriate regulation 4 Cost control 5 Staffing 6 Interest rates 7 Competition 8 Managing technology 9 Political interference 10 Credit risk Future risks 1 Competition 2 Staffing 3 Political interference 4 Too much funding 5 Credit risk 6 Strategy 7 Mission drift 8 Ownership 9 Interest rates 10 Unrealizable expectations
These various threats gleaned worldwide need to be assessed vis--vis the situation in Pakistan and measures taken to mitigate them. That is probably a job for PMN in light of its pilot project and its later transformation into Pakistans MFCIB.
Centre for the Study of Financial Innovation, Microfinance Banana Skins 2008: Risk in a booming industry, London and New York, February 2008, page 10
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Whether the pilot project meets its members expectations, increases the size of the MF market and reduces objectionable practices remains to be seen. The potential for success certainly exists given the enthusiasm of major MFPs. It is a matter of stakeholder willingness and persistence in pursuit of the goal. The pilot project should lay a firm foundation for the future MFCIB. A failure now to create and operate a respected CIB dedicated to the microfinance sector is likely to set back future efforts indefinitely. Stakeholders agree that the window of opportunity is now.
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SECTION V. CONCLUSIONS, RECOMMENDATIONS AND NEXT STEPS

A. CONCLUSIONS The interviews and research conducted for this study have yielded a number of conclusions, presented here by subject. The main result of this study is that an MFCIB is quite feasible in Pakistan, even quite likely, given certain important assumptions: 1. The continuation of the positive microfinance market conditions identified, 2. The absence of internal or external shocks that would disrupt or delay the process, and 3. 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. 1. An MFCIB and Government Policy An MFCIB will be a necessary ingredient in the Government of Pakistans program to extend access to financial services throughout the country so that poverty levels can be reduced. More specifically, an MFCIB will produce the following benefits, ones that specifically relate to the Governments policy goals. An MFCIB will: 1. Extend the outreach of credit to low income families 2. Mitigate poverty by expanding access to finance to women and to the entrepreneurial base of the rural areas 3. Strengthen the credit culture on both sidesteaching lenders how to assess credit risk and rewarding good borrowers by reducing access to finance for bad borrowers 4. Increase the share of private credit in GDP, which is comparatively low in Pakistan 5. Permit more efficient management of credit risk by lenders 6. Promote competition among MFPs, which will help reduce lending rates and extend the maturities of loans 2. The State of the MF Market 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. There are many elements supporting the creation of an MFCIB. They include: a) The microfinance sector represents a market with huge upside potential (25-30 million borrowers), which creditors are increasingly eager to tap. b) There is 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
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c) The Pakistan Microfinance Network whose members account for 96% of microfinance lending is squarely supportive of a CIB. d) There is unqualified support at the highest government levels for extending financial services throughout the country via MFIs. e) The regulatory and legal regimes, which are usually serious roadblocks to a CIB, are generally favorable in Pakistan. f) A national ID card exists that removes much uncertainty and mismatch regarding the identity of borrowers 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 Draft addresses many key principles and conventions needed in such a law based on international standards, but omissions and contradictions remain and need to be addressed. Mobile banking (or branchless banking) is likely to develop rapidly in Pakistan and should enhance the need for and value of an MFCIB, since it will permit the deepening and broadening of the MFCIB data base. The growth of Islamic financial products will also help bring the unbanked into the formal system. 3. Future Demand for Micro-credits. 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. Our own estimate of future demand for micro credits (Annex D) involved using conservative assumptions, such as a small number of initial inquiries, below-market level fees, and no donor support. 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. 4. Obstacles and Constraints There are also a number of obstacles facing the creation of a commercially sustainable MFCIB. The principal ones include 1. Inaccurate and incomplete data on MF borrowers 2. The lack of skilled staff at microfinance institutions and varying states of MIS mismatch among MFPs 3. 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. 4. Gaps and ambiguities in the legal and regulatory environment
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5. The financial weakness and non-commercial, poverty-alleviation approach by some significant micro-credit providers 6. Approximately 25 percent of Pakistanis do not have a CNIC (computerized national ID card), an obstacle to increasing access to financial services, particularly in the case of women in remote and rural areas. 5. The Role of State Bank The role of the State Bank of Pakistan in creating, enabling, regulating and running an MFCIB was a subject of wide discussion. A large majority of those interviewed held that SBP should facilitate the creation of an MFCIB, but not own it or manage it. The private sector should own and operate it. This view is in line with international best practice. 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. This is also within the guidelines of international best practice. 6. Problems with eCIB Practices and Output Respondents acknowledged the size and utility of the eCIB. Nonetheless, they complained that the credit reports produced by eCIB do not give lenders a complete picture of a client. There is only once-a-month reporting so credit reports are not up to date. The reports lack sufficient data on the borrowers total liabilities and payment record and are out of date prior to the preceding twelve months. The eCIB server is reportedly down more than it should be, and it does not sort incoming data well for errors. Finally, there is no mechanism in place for borrowers to access their own credit information or to correct errors in the file. 7. The Lahore Pilot Project The Lahore pilot project, currently in the planning stage, is an important first step toward an MFCIB. The largest MFPs in Pakistans most competitive MF market (Lahore) are participating in the project. Its installation and support will help instill good practices. The obstacles to creating and operating an MFCIB are not enormous; it is a matter of willingness by participants plus some initial donor support. The pilot projects success or failure will ultimately determine whether an MFCIB is in fact feasible. B. RECOMMENDATIONS Many recommendations flow from the above conclusions: 1. Steps by the Government Government should continue its support for building the information infrastructure, namely encouraging information sharing among lenders, promoting strong accounting standards and more transparent financial statements, revising bank secrecy laws, and eliminating restrictions on access to public records. To gain credibility and trust, an MFCIB must be safeguarded against political and other outside influences. It should be an independent private entity governed by
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a code of conduct and state-of-the-art data protection systems. The government should have no control over the MFCIBs daily operations and no access to its files (except upon court order). The MFCIB must be indemnified against law suits claiming breach of confidentiality; otherwise, its independence and effectiveness would be compromised. The private bureaus currently operate in a vague and undefined legal and regulatory environment. Gaps should be filled and ambiguous elements clarified. It is imperative that the government give explicit legal permission to the private bureaus to collect positive and negative information from commercial banks and nonbank creditors. The progress of the Draft Credit Bureaus Act, 2007 through the government bureaucracies has been slow. The Draft Act should be amended as indicated in this report and expedited through to the National Assembly for passage.
The GOP is aiding the MFBs by giving them a tax exemption for the first five years of their life, which helps them build equity. This exemption could be extended to an MFCIB once it becomes profitable. The GOP receives substantial grants from international financial sources, a small proportion of which could be used to establish a Microfinance Fund. Monies could be provided (for MIS upgrading, for example) to those MFIs that meet good governance and business model requirements and have the potential to grow. The SECP as overseer of non-bank financial companies should require that NBFCs send their customer payment data to the MFCIB. An MFCIB link with NADRA should be established to deepen its data base and to catch errors and omissions in MFCIB member input. NADRA should become more active in expanding its CNIC activities, perhaps to include the MFIs that are not currently part of the NADRA system. Here is a suggestion (not yet a recommendation): To reduce the risks that investors will perceive in an untested company, the MFCIB could be registered with SECP as a limited company with guarantees (per the Companies Ordinance 1984), much as PPAF is. After five years, it can re-register as a limited company limited by shares. That way, the investor gets security but foregoes dividends in the early days while getting his profits later when the CIB is more viable. 2. State Bank The State Bank of Pakistan should undertake these steps: Consider grants or funds for technical assistance to help this new segment of the financial infrastructure get started.
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Use its influence and authority to promote publicity and awareness about the new MFCIB so that trust can be generated. Lead the campaign to ensure that the CIB is privately owned and operated with an independent Board of Directors and that public awareness of a CIBs functions and benefits are widely distributed. Encourage the use of savings within the microfinance industry. Savings are a key way for MFIs to become sustainable by providing cost effective funding. Persuade the local capital markets to play an increasingly active funding role with creative structures. Provide incentives to MFBs, like Khushhali Bank, to raise their rate of customer savings accounts and deposit accounts in order to help the banks fund additional assets. 3. eCIB at State Bank The eCIB needs to take a number of steps to improve the quality of its data and its operations. The principal ones are 1. Removing the ambiguity in its credit reports about a borrowers payment performance within and beyond one year 2. Offering periodic training of the staff at regulated financial institutions engaged in eCIB data collection and transfer, since the controls and data processing at contributing banks are not up to modern standards. Training will greatly reduce the level of incomplete and incorrect data that eCIB receives. 3. Upgrading its help desk to be more responsive to questions and concerns. 4. Microfinance Providers The direction of the MF market and hence the fate of an MFCIB reside primarily in the hands of the principal actorsthe MFPs. They need to take steps to upgrade their programs, their strategic plans and their MIS/IT systems. All MFPs need training and capacity building to ensure that staff is skilled in handling sensitive and timely data and the latest software. MFIs need to approach their business in a more competitive and marketoriented manner. To survive without future donor assistance, they all need to rethink their social missions. This way they will be able to attract private capital (funds from the formal sector and from abroad) to further enhance their financial sustainability. MFIs should consider acquiring a credit rating from an international rating agency, which would raise their profile in the markets and make funding more likely and less episodic.
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The MFBs need to mobilize savings domestically to fund the anticipated growth in demand for microfinance. Wholesale funds/apex institutions, like the PKSF in Bangladesh and PPAF in Pakistan, have effectively supported microfinance programs with financial and technical assistance at different stages of their development. Such institutions have the resources and capacity to reduce MFI reliance on subsidized or donor funding by replacing grants with equity and then linking governance standards to further equity injections. This model should be tested in Pakistan. The FSSP should provide TA as part of its mandate. 5. MIS and IT Challenges The internal MIS of the RSPs and other MFIs must be brought up to modern standards to provide the ability to link to the CIB in real time and to upload and download data safely. This will require 1. IT upgrading across the board 2. More focus among MFIs on data accuracy and compatible MIS formats 3. Assessing the MFIs MIS to see if they can produce and manage data quickly and accurately. 4. Harmonizing basic banking and microfinance terminology and definitions across financial institutions so that inputs to the MFCIB are consistent. 5. Creating access to the CIB at the village level since most lending decisions in MF are made there, not at the HQ level. 6. NGOs and Donors 1. At the outset inquiry fees from MFCIB members will not suffice to cover operating costs. Investors and international donor assistance will be required to give the MFICB some breathing room in the first few years. The NGOs, which are the principal beneficiaries of MFCIB output, should contribute equity or trained workers. 2. It is in the interest of the outside donor community to help underwrite initial costs so that the MFCIB can gain a foothold. A financially sustainable MFCIB will permit donors to wind down funding as MFPs manage their credit risk more fruitfully. 7. The Lahore Pilot Project MFP participants in the pilot project need to establish ground rules and come to a consensus on needs and expectations. A working group of senior officers at the eleven participating organizations should meet fortnightly to discuss outstanding matters and to ensure implementation of decisions taken. Momentum must not be lost. The Lahore pilot project coordinators, ideally with external TA, must determine quickly the extent to which MFIs are prepared to produce data consistently and reliably so that the data pool at the MFCIB is broad, deep and accurate.
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Each MFPs MIS should have the capability to interface directly with the data requirements of the MFCIB without human, error-prone intervention. To begin with, input from members on all loans should be weekly (not monthly). For its part the pilot project must ensure that the credit reports it returns to inquirers are rapid, timely and offer ease of analysis. Less than this standard will stifle the MFCIBs development. The PMN and its pilot project participants should discuss with the Central Board of Revenue how the two can benefit by sharing information. The MFCIB can indirectly assist the CBR to collect taxes due if the CBR agrees to provide tax delinquency data to the MFCIB. The MFCIB in turn could provide tax delinquency information in its credit reports for MFPs to use as leverage on borrowers. 42 In that way arrears can be cleared, a larger proportion of taxes due can be collected, and potential tax delinquents will receive a clear message that you may not get a loan if you have taxes outstanding.
Future Studies Two studies related to the subject of an MFCIB should be undertaken: First, there is one sector that no existing or contemplated CIB currently coversthe 99% of all businesses in Pakistan that are small to medium-sized enterprises (SMEs). The Governor of the SBP reportedly stated there is a need for a bureau devoted to SMEs. In fact, State Banks eCIB has the capacity to reach into that sector once commercial banks decide to lend. The association of SMEs (SMEDA) has on several occasions discussed internally the need for a unit that could gather and house information on SMEs and on those from whom receivables are due. SMEDA is exploring the possibility of seeking a helpdesk within SBP for that purpose. Whether SMEDA should attempt to create a CIB solely for its members or link up with an existing CIB (public or private) is one that can be explored. Second, another segment of the economy offers unlimited demand for micro creditsthe petty laborers in both urban and rural settings who are in effect chained to moneylenders in the informal sector. This sensitive subject is
Two points should be kept in mind in dealing with tax issues and the MFCIB. First, the tax authorities should not have the right to make inquiries of the MFCIB, only to supply information; otherwise, borrowers will be very reluctant to allow MFPs to collect their personal information for fear it will fall into government hands. Such fears or even rumors to that effect will doom an MFCIB. Taxpayers are cynical enough already about tax administration, given the perception that politicians spend their money in an arbitrary and unaccountable manner. Second, the consultant does not recommend that the GOP pass a law, as some have suggested, that would forbid lenders from making loans to those who have taxes in arrears. Decisions about the criteria for loan approvals are for the creditors and the market to decide, not the government. Banks that do not follow prudent lending policies, e.g., KYC, and risk management techniques as determined by the regulator should be permitted to endure the consequences of imprudence.
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infrequently addressed in the media or in government circles 43 because it speaks directly to an imbedded socio-cultural aspect of Pakistani life, that is, the existence of a widespread informal financial market that takes advantage of the poor and illinformed by lending money at such high annual rates (45% to 75% or more) that the farmers, field laborers, fishermen, auto rickshaw drivers and artisans who avail themselves of the moneylenders services are indebted to them indefinitely. If these workers and their families could somehow be released from their bondage, they would comprise an immense source of demand for micro credits. C. Next Steps Given these conclusions and recommendations, what is the best way to proceed? The first step is to implement the recommendations listed. Simultaneously, the following actions can be undertaken. While a month-by-month timetable is provided here, the steps will necessarily overlap and will take more time than just the month in which they are shown. Delays in implementation will likely extend the timetable. As PMN is the leader and organizing force behind the pilot project, it should take the lead in following this timetable along the path toward establishing an MFCIB. April 2008 Issue an RFP to the four private CIBs asking how they would propose to collaborate with PMN in the pilot project (IT solutions) and beyond (longerterm partnership). Seek advice from foreign experts in the technical/software and training areas. Such advice is readily available, is state-of-the-art and can be obtained with donor assistance. Provide input to the Ministry of Finance, the Ministry of Law and State Bank regarding the Draft Credit Bureau Act 2007 that is circulating in official circles to ensure there are no conflicts between the Draft Act and the ability of an MFCIB to function. The comments in this report can be a guide.
May 2008: Draft an agreement among microfinance providers to help ensure cooperation and encourage information sharing. The agreement should contain detailed clauses on the handling of sensitive data, including storing, back-ups, deletion of data, updating, etc., as well as the rules about the data subjects right to see information and get it corrected. A carefully worded agreement will minimize the MFPs legitimate concern about protecting their clients and
A recent study that addressed this issue was Adnan Qadir, A Study of Informal Finance Markets in Pakistan, prepared for the Pakistan Microfinance Network, December 2005. One conclusion in the study was that as long as the formal financial sector does not reach down to the poor and as long as a weak contractual environment pervades society and as long as transaction and transportation costs are high, the informal financial sector will not disappear because it is serving clients needs. Moreover, policy makers at the national and provincial levels can do little to ameliorate the situation because of the influence of vested interests.
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losing customers. The draft agreement should be sent to the eleven pilot project participants (and to SBP) to move that process along as well as to all other MFPs so that they may see what their competitors are doing. Set up a Working Group comprised of the principal pilot project participants to oversee the project. The Working Group should select a chairman and establish a series of subcommittees to address the principal issues that need addressing, such as fees, government relations, the business plan, consumer rights, technology/MIS and legal/regulatory matters. The subcommittees and the Working Group should meet every two weeks review progress and set targets for the next meeting. Hire TA to evaluate IT/MIS readiness and compatibility of MFPs systems
June 2008: Develop a business plan. What sources of equity capital are anticipated? Estimate the likely revenue and cost components of an MFCIB over the next 3-5 years with upside and downside scenarios. Without a business plan, it will be difficult to find investors or donors willing to commit to the enterprise. Confirm stakeholder willingness to commit resources to the endeavor, such as human capital, equity capital and operating cost coverage. Liaise regularly with SBP officials so that misunderstandings are avoided. The SBP is already quite supportive of a private MFCIB initiative, and this backing must not be allowed to dissipate. Arrange for monthly reports and quarterly meetings with the SBP regarding progress and problems. Obtain signed contracts with all major users and providers.
July 2008: Begin now and continue to undertake a nationwide awareness-raising campaign because for the MF market to grow enough to sustain an MFCIB over time, borrowers must be educated about their benefits and rights. Lawyers and public policy makers must be educated as well to prevent unnecessary legal obstacles down the road. September 2008: Arrange for two or three members of the Working Group to visit MFCIBs in several countries in Africa and/or Latin America, to learn how they avoided or overcame pitfalls along the road to sustainability. Produce sample credit report on a client to test format, scope and IT systems Create manuals for CIB employees and credit officers at member institutions as guides to data processing, permissible information flows and consumer rights
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Conduct continuing seminars open to public with media coverage; use ADB and other experts to make presentations
October 2008: Set up bank account, hire accounting firm, and acquire needed capital inputs Start implementing business plan (renting space, equipping, hiring, marketing) Formally incorporate and register the private, independent CIB Begin advertising for qualified technical and managerial employees for CIB Appoint a CEO or Managing Director for the CIB Identify remaining difficulties/roadblocks hampering effective functioning of the MFCIB and develop a plan to reduce or eliminate them
November 2008: Continue testing hardware/software to eliminate mistakes in data and data transmission Finalize/test IT connectivity and internet/inter-MFP safeguards and software. Continue seminars and public speeches by pilot project members in order to reduce doubts about information sharing and to educate the private sector and government institutions on the role of the CIB and the problems it will solve Update the business plan in the light of experience to date Hire a reputable public relations firm; undertake a public awareness campaign and consensus building among consumers, businesses and public officials. Educate these constituencies on the nature, role, purposes and benefits of a CIB, using workshops, print media, brochures and information bulletins. Use other country examples as illustrations Target marketing efforts to those MFPs not participating in the pilot project
December 2008: Begin producing a monthly newsletter plus articles in the mass media and financial journals about the pilot project and its transition to MFCIB 2009 and Beyond Arrange to train judges, lawyers and politicians on the laws regulating CIBs activities, on permissible uses of credit information and on consumers rights
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Once operating smoothly, widen the scope of the MFCIB to include information from large retailers and utilities whose clients are MF borrowers.
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Annex A List of Persons Interviewed

NAME Government of Pakistan
Qasim Nawaz Muhammad Ashraf Khan Syed Irfan Ali Saleem Ullah M. Javaid Ismail Mahmood Shafqat Mufti Zulfikar A. Khokhar Syed Ali Jafar Abidi Allauddin Achakzai Zehra Rizvi Muhammad Saleem Qazi Shoaib Ahmad M. Iqbal Hussain Muneeb Zia Akif Saeed M. Asif Jalal Bhatti Saleem Ahmed Moeen Shaukat Raza Butt
TITLE
Director, SME & MF Director, Agric. Credit Director, Policy & Regs. Dir., Devel. Fin. Support Sr. Joint Dir., Surveillance Sr. Jt Dir., Islamic Banking Joint Director, MF Joint Director, CIB Joint Director, SME Regulating Officer Jr. Joint Director, CIB Junior Joint Director Sr. Jt Secretary (Inv. Div.) Legal Expert Exec. Director, SCD Director, M&I Chairman Main Staff Off. To Chrmn.
ORGANIZATION
State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan Ministry of Finance Ministry of Finance Securities and Exchange Commission of Pakistan SECP NADRA NADRA
Donors
Haroon Sharif Roshan Ara Stephen Rasmussen Shamsuddin Ahmad Isfandyar Zaman Khan Senior Advisor, Private Sector Development Program Officer Lead Specialist, F&PSD
Sr. Financial Sector Specialist
Specialist, F&PSD
Department for International Development European Commission World Bank World Bank World Bank
Projects Supported by Donors

Khalid Nawaz Project Director Financial Sector Strengthening Program
NGOs
Gregory C. Chen Tabinda Jaffery Zareen Aly Wasim Khan Sadaffe Abid Naghma Rashid Shahid Mahmud Amjad Saqip Country Representative CEO G.M., Operations CFO CEO Executive Director
Asst. Mgr. Field Operations
Executive Director
Shore Bank International Asasah Asasah Asasah Kashf Foundation DAMEN DAMEN Akhuwat
Rural Support Providers
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Agha Ali Javad Abid Saeed Muhammad Rafiq Mukhtar Ahmed Chaudhry Masood ul Mulk
General Manager Chief Operating Officer CFO General Manager CEO
Natl Rural Support Program Punjab Rural Support Program (PRSP) PRSP PRSP Sarhad RSP
Commercial Banks
Yasmin Adhami Shahid Ikram Suleiman Zubair Saleem Baig Amber Nadeem Paracha Sarmad Qureshi Shahid Mir Haji Abdul Rehman SVP, Head Credit Admin. VP, CIB Senior Officer, CIB V.P. Credit Management V.P. Country Risk Office Head, Policy/Portfolio Management EVP, Head Credit Policy SVP, Head Credit Admin. Habib Bank Habib Bank Habib Bank National Bank of Pakistan ABN-Amro ABN-Amro UBL UBL
Microfinance Banks
Ghalib Nishtar Hussain Tejany Mutabiat Shah S. Faiq Husain Nadeem Hussain Ozair Hanafi Moazzam Khan Shoaib Arif President President & CEO Head, Client Markets President & CEO President & CEO President & CEO President & CEO SVP Credit Operations Khushhali Bank First Microfinance Bank First Microfinance Bank Rozgar MFB Tameer Microfinance Bank Pak-Oman MF Bank Network MFB Network MFB
Credit Bureaus
Tariq Nasim Jan Faheem Ahmad Sabeen Saleem Bilal Aftab Babar Mufti Syed Azfar Ali Baqvi Syed Wajih Hassan Javed Malik Nauman Sheikh Managing Director CEO Group Head General Manager Managing Director Group COO Head, Risk Mgmt Services CEO Dir., Technical Operations Data Check Ltd. JCR-VIS JCR-VIS NEWS-VIS International Credit Information Ltd. (ICIL) ICIL ICIL Credit Chex Credit Chex
Rural Support Providers Wholesalers

Tariq Khan Baluch Kamran Akbar G.M., Credit & Enterprise Development Chief Operating Officer Pakistan Poverty Alleviation Fund (PPAF) PPAF
Others
Syed Mohsin Ahmed Moazzam Iqbal General Manager Network Coordinator Pakistan Microfinance Network (PMN) PMN
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Ammar Valika Huma Zaman Ms. N.A. Mirza
Project senior consultant Project legal consultant Manager, Micro Finance
Sidat Hyder Morshed Associates Mandviwalla & Zafar Orix Leasing
Annex B Basic Principles of a CIB:

1. Voluntary participation and cooperation: Association and membership in the MFCIB are voluntary. No law should force banks or non-bank institutions to participate. Member institutions agree to cooperate for their mutual benefit and for the economy of Pakistan. 2. Independence: The MFCIB will be privately owned and operated and independent of government ownership. The MFCIBs regulator and board of directors may contain representatives from both the public and private sectors. 3. Comprehensiveness: The MFCIB will collect complete credit information about customers, including negative payment data (failure to satisfy credit agreement termseither outright defaults or delays in payment) and positive payment data (behavior consistent with the terms of a credit agreement), in order to acquire a comprehensive picture of the consumer and to enable banks to enhance their credit portfolios. 4. Reciprocity: Information is only shared with those partners (shareholders and other members) who supply information to the MFCIB. Only they have the right to access the MFCIB database provided they share their complete data on a regular basis and abide by agreements. 5. Reliability: Institutions providing information are responsible for the correctness and authenticity of the data provided. If the data are erroneous, the member is obligated to correct it. The MFCIB is responsible for the correct and accurate processing of the data. 6. Neutrality: The function of the MFCIB is to gather, to process and to distribute financial and other data from its members and to its members. The MFCIB is an intermediary and does not make credit decisions. 7. Confidentiality and disclosure: When an inquiry is made, the inquirer must provide both an entry code and some ID information on the legal or physical entity inquired about. The MFCIB will disclose information only to member institutions and only that information supplied by the member institutions. The MFCIB will only disclose specific information pertaining to a specific inquiry. 8. Maximum security: All information acquired by the MFCIB must be deemed confidential, and various physical, technical and organizational measures must be taken to protect the data.
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9. Protection of borrowers rights: It is the responsibility of both the MFCIB and member institutions to protect borrowers rights, including their right to correct erroneous information in their credit file.
Annex C Bibliography
Ahmed, Syed Mohsin and Shah, Mehr, Amendments to the Microfinance Institutions Ordinance, 2001: Implications for the Sector, Essays on Regulation and Supervision, October 2007. Akhtar, Dr. Shamshad, Governor, State Bank of Pakistan, Banking Sector Reforms: Performance and Challenges, Speech in Geneva, February 1, 2007. Akhtar, Dr. Shamshad, Governor, State Bank of Pakistan, Expanding Microfinance Outreach in Pakistan, a presentation to the Prime Minister, February 14, 2007. Asian Development Bank, Proposed Loans and Technical Assistance Grants, Islamic Republic of Pakistan: Improving Access to Financial Services (Phase 1) Program, Project No. 39492, November 2006. Barger, Teresa, Senior Manager, IFC Central Capital Markets Department, Lessons of Experience No. 6: Financial Institutions, IFC, Washington D.C., 1998. Basu, Priya, A Financial System for Indias Poor, H.T. Parekh Finance Forum, Economic and Political Weekly, September 10, 2005, pp. 4008-4012. Bate, Peter, Governments in Microfinance: threat or opportunity? Microenterprise Americas Magazine, Fall 2007, from the Inter-American Development Bank website. Centre for the Study of Financial Innovation, Microfinance Banana Skins 2008: Risk in a booming industry, London and New York, February 2008. Conference on Next Generation Access to Finance: Gaining Scale and Reducing Costs with Technology and Credit Scoring, September 17-19, 2007, Washington DC Consultative Group to Assist the Poor (CGAP), Commercial Banks and Microfinance: Evolving Models of Success, Focus Note #28, June 2005. CGAP, Interest Rate Ceilings and Microfinance: The Story so Far, Occasional Paper No.9, The World Bank, Washington, DC, September 2004. CGAP, Notes on Regulation of Branchless Banking in Pakistan, Washington, DC, June 2007. CGAP, Pakistan Country-Level Effectiveness and Accountability Review with a Policy Diagnostic, The World Bank, Washington, DC, April 2007. CGAP, Good Practice Guidelines for Funders of Microfinance, The World Bank, Washington, DC, October 2006.
Final Report
Page 105 of 107
CGAP, Use of Agents in Branchless Banking for the Poor: Rewards, Risks, and Regulation, Focus Note #38, October 2006. CGAP, Using Technology to Build Inclusive Financial Systems, Focus Note #32, January 2006. Credit Bureau Development in South Asia, Finance and Private Sector Development Unit, World Bank, Washington, DC, September 2004. Credit Bureau Knowledge Guide, IFC, Washington D.C., September 2006. Expanding Access to Finance: Good Practices and Policies for Micro, Small and Medium Enterprises, World Bank Institute, Washington, DC, May 2007. Global Credit Bureau Status Report, A Presentation at October 2006 Conference in Cape Town, by Peer Stein, Head, Financial Infrastructure & Institution Building, International Finance Corporation, October 8-10, 2006 Hoffman, Jenny, Risk Frontier Consultants, Mobile Banking: Implementation Choices, Working Draft, prepared for Fin mark Trust, November 2006. Honohan, Patrick, Financial Sector Policy and the Poor, World Bank Working Paper No. 43, Washington, DC 2004. Imady, Omar and Seibel, Hans Dieter, Principles and Products of Islamic Finance, University of Cologne Development Research Center (no date). InfoCred and Fin Rural, Feasibility Study for the Establishment of a National Credit Bureau in Pakistan, La Paz, November 29, 2004. Khan, Aftab Ahmad, Role of institutions in economic development, The News, November 12, 2007. Luoto, Jill; McIntosh, Craig; and Wydick, Bruce, Credit Information Systems in LessDeveloped Countries: A Test with Microfinance in Guatemala, The University of Chicago Press, 2007. Microfinance Information Exchange, Inc., The Micro Banking Bulletin, Spring 2007. Miller, Margaret J., ed., Credit Reporting Systems and the International Economy, The MIT Press, Cambridge, Mass., 2003. Pakistan Microfinance Network, Pakistan Microfinance Review 2006: Shades of Growth, Islamabad, 2007. Pakistan Microfinance Network and Shore Bank International Ltd., Microfinance Performance in Pakistan, 1999-2005, Islamabad, 2006.
Final Report
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Pakistan Microfinance Network and Shore Bank International Ltd., The Dynamics of Microfinance Expansion in Lahore, Islamabad, June 2007. Poverty and Social Impact Assessment: Pakistan Microfinance Policy, Oxford Policy Management Ltd., May 2006. Qadir, Adnan A Study of Informal Finance Markets in Pakistan, prepared for the Pakistan Microfinance Network, December 2005. Ritchie, Anne, Community-based Financial Organizations: A Solution to Access in Remote Rural Areas? World Bank Discussion Paper 34, Washington DC, 2007. Sevak Solutions, Microfinance and Branchless Banking: Models, Constraints and Recommendations, Pakistan Study, May 25, 2007. Shore Bank International Ltd., India Microfinance Learnings Visit: March 12-16, 2007. State Bank of Pakistan, Banking System Review, December 2006.
Final Report
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Technical Assistance Consultants Final Report

Project Number: TA 4894 November 2009

Prepared by FINCON Services Inc.

For Ministry of Finance & State Bank of Pakistan

Improving Access to Financial Services in Pakistan

Credit Information Bureau

Submitted by: Fincon Services Inc. Canada

76 79 82 86 91 91 93 98 102 104 105

Table 17: Sample of MFIs Participating in PMNs Pilot Project.

ACKNOWLEDGEMENTS AND ABBREVIATIONS

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

The Microfinance Sector in Pakistan*

ADB TA 4894-PAK: Improving Access to Financial Services

Table 2: Microfinance Providers (MFPs)

Orangi Pilot Project

ADB TA 4894-PAK: Improving Access to Financial Services Bank Pak-Oman MFB

Community Support Concern

ADB TA 4894-PAK: Improving Access to Financial Services

Table 3: The Beneficial Effects of Introducing an MFCIB in Pakistan

Effect of Introducing an MFCIB

Low outreach, large untapped market

Few loan products to attract clients; lack of term funding sources

ADB TA 4894-PAK: Improving Access to Financial Services

MFP staff untrained in risk management

ADB TA 4894-PAK: Improving Access to Financial Services

SECTION II. THE CURRENT ENVIRONMENT

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

Table 4: Active Borrowers* in eCIB Data Base

ADB TA 4894-PAK: Improving Access to Financial Services

Table 5: Inquiries to the eCIB Regarding Consumer and Corporate Borrowers

Source: State Bank of Pakistan. Data collection began in June 2006.

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

2007 2008 2009 2010 2011 2012

1.35m active borrowers 1.49m 1.63m 1.80m 1.98m 2.17m

2007 2008 2009 2010 2011 2012

1.35m active borrowers 1.62m 1.94m 2.33m 2.80m 3.36

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

ADB TA 4894-PAK: Improving Access to Financial Services

Table 6: Stakeholder Matrix

Stakeholder Analysis Matrix: Level of Interest: the Key Participants

ADB TA 4894-PAK: Improving Access to Financial Services

High Moderate to high None High

Yes, TA Yes No Yes

Stakeholder Analysis Matrix: Timing and Information Availability