Starting Your Own Microfinance Bank in Pakistan

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GMT - 3 Hours Starting Your Own Microfinance Bank in Pakistan

Post by Jaya Kumar on Sun Apr 20, 2014 3:34 pm

My dream for Microfinance Bank
From the day I heard about a strange little thing called micro-finance (or micro-credit) I’ve had a dream to create an organization which would participate. It usually takes me a few years to make a dream this big turn into a reality. There’s the day-dreaming, the peripheral research, the active research, the “holy crap, this could actually work” phase, the planning, and then the doing. It’s a long process, but I’ve done it before, and I will do it again, over and over and over again.
The problem (there’s always a problem, isn’t there?) is I don’t know squat about the intricacies or processes of a lending organization. I’ve never worked at a bank. I’ve never been an accountant or bookkeeper, and honestly, I hate doing my own finances.
But, what I do love is the amazingly massive amount of good will and huge PEVZ created by microfinance. As an entrepreneur, I’m always looking for new ways to create wealth; not just for myself, and certainly not only the economic kind. The holy grail of my passions have to do with combining life enhancement (via psychological, identity, or just “life” coaching), economic viability, entrepreneurship, and teaching. For me, that is what microfinance is all about.
Have you ever watched the faces of students who understand geometry for the first time?
Have you ever given money anonymously to you someone who’s been financially troubled? Then, they see you one day and they talk about some anonymous donor who changed their lives for the better.
Have you ever given a soccer ball to a kid who’s never seen one before?
In every circumstance, you’ve changed their world. You’ve created “wealth”. It didn’t exist before, but you just created it out of thin air. It’s amazing to watch their worlds change for the better, and being a part of life-changing endeavors has always been my goal.
The microfinance podcast
What sparked my interest in microfinance lately was listening to a podcast (attached to this article) series put on by the Stanford Technology Ventures Program. It’s a podcast stream titled Entrepreneurial Thought Leaders and this particular one was “The Microfinance of Entrepreneurship, with Geoff Davis (Unitus)”.
Here it is: (Update: Unfortunately this podcast was lost in the transition to a new blog theme. It may be available by searching Google or Stanford Technology Ventures Program site.)
The problem of microfinance
The problem Mr. Davis mentions in this podcast is the trouble with the microcredit organizations in their attempts to reach those who need microfinance. The statistic he gave was that microcredit organizations, both non-profit and for-profit, are only reaching 20% of the people who need it.
Let’s just stop there. If you don’t already know this, microfinance is a 30 year old industry. This is not a new industry, folks. And in 30 years the industry as a whole only has a worldwide 20% market penetration. Amazing.
It sounds like an industry failure to me. I mean, when you’re not reaching 80% of the people who would gladly take you up on your services, regardless of whether it’s for or non-profit, you’ve got some issues to solve.
A solution to the microfinance problem: Banking
Now, these problems aren’t insurmountable. One of the reasons why there’s only been 20% market penetration in microlending is that up until recently it has been attempted by non-profits only. The biggest reason why this is an issue is that non-profits generally rely on either government grants or big financial backers who essentially have disposable income they are willing to donate instead of invest or purchase stuff with. Unfortunately, that severely limits how much money can get into these organizations which, in turn, limits their possible expansion and growth rates.
Blech, that was a lot of college-word terminology all to say they don’t have the clink to grow fast enough.
So, what’s the solution? Microfinance Bank could most certainly be one.
It solves two issues:

  • Decentralization of “retail” outlets. Each new “retail” outlet is its own business and therefore has little reliance on centralized overhead and structure.

  • Turning into a for-profit enterprise means you get access to the big money through capital markets like the stock market, etc.

So, the biggest response that immediately comes up is “But you’re taking a socially-good idea and now making money off of it? Isn’t that seriously wrong somehow?”
I answer a hearty “Absolutely not!”
Making money is the primary goal of for-profit organizations, for sure. But, I’ll take a set of for-profit companies changing the world over non-profit companies missing the opportunity any day of the week. The risks of inactivity completely outweigh the potential risks of gouging. Gouging and predatory lending already happens (at a 3000% monthly interest rate!). The competition by other microfinance companies, as well as government oversight on lending companies and banks, will keep the interest rates low enough to still be helpful.
And that’s the point — changing the world for good.
If that can be done through for-profit franchising of microfinance, I’m all in.
Now for the good stuff: Resources
As you might know by now, I’m apparently a knowledge broker (also known as an infomediary). That just means I like putting information together for people (and futzing).
So, below you’ll see the podcast (again) which you should listen to along with a PDF I found along the way which describe some of the issues related to starting a microlending organization in the wake of regional conflicts. Then, when you’re completely convinced that you want to start a microfinance company too, join Intellecash as a franchise and you’re on your way to becoming a microlender, changing the world in extremely significant ways.
I guarantee within a few years I will be running my own microfinance company, and it could very well be by starting a microcredit franchise through Intellecash.
(Update: Unfortunately this podcast was lost in the transition to a new blog theme. It may be available by searching Google or Stanford Technology Ventures Program site.)
Financing of Income Generation Activities in the Wake of Conflict (pdf)
Jaya Kumar
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GMT - 3 Hours Re: Starting Your Own Microfinance Bank in Pakistan

Post by plhr60 on Sun Apr 20, 2014 3:38 pm

Great article. You’ve provided a lot of wonderful information. I like the problem/solution format.

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GMT - 3 Hours Re: Starting Your Own Microfinance Bank in Pakistan

Post by Victoria333 on Sun Apr 20, 2014 3:42 pm

i really wanna start a micro finance company but shot of ideas and format.

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GMT - 3 Hours Re: Starting Your Own Microfinance Bank in Pakistan

Post by Tim Hollibone on Sun Apr 20, 2014 3:45 pm

Hi [You must be registered and logged in to see this link.]! I’m glad to come across this helpful info. Setting up a micro fin. Org. is my passion & dream. However, my problem is the capital to start, since i don’t have any.  razz 

I need your help, what should i do?
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GMT - 3 Hours Re: Starting Your Own Microfinance Bank in Pakistan

Post by Jaya Kumar on Sun Apr 20, 2014 3:53 pm

[You must be registered and logged in to see this link.], thanks for commenting. I get a bunch of people contacting me asking for assistance to build a microfinance organization. The thing is I’m not an expert in building them from scratch. I might suggest that you could actually talk to your local MFI (microfinance institution) about financing what you want to build. It may sound funny to get financed to be a financier, but that’s probably the most sensible suggestion I can give.
One caution: If you aren’t good with finance, I’d suggest taking some classes before even considering building one of these organizations. You may have good intentions, but without the experience, finance companies are the fastest to drown themselves.
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GMT - 3 Hours Re: Starting Your Own Microfinance Bank in Pakistan

Post by Bao on Sun Nov 06, 2016 5:00 pm


Pakistan has a separate legal framework to govern the microfinance activities of the Microfinance Banks (MFBs). The MFBs are licensed and regulated by State Bank of Pakistan. Considering the separate needs and dynamics of microfinance, SBP has in place a separate regulatory and supervisory framework for MFBs. Since its creation, the policy framework has seen various improvements on the basis of feedback of key stakeholders and assessment of the evolving needs and conditions of the sector. To promote the mainstreaming of microfinance into overall financial system, SBP encourages creation of new MFBs and transformation of existing operationally sustainable MFIs into MFBs. The presence of a large potential market and availability of an enabling policy environment offer the opportunities for both social and commercial investors to explore this segment of the financial market.

The growth and sustainability continue to be the two guiding objectives for the development of the sector. SBP is fully cognizant of the fact that pursuing these two objectives concurrently is a challenging task. This requires vision of sponsors / management, deep understanding of the target market, viable business model, appropriate organizational structure, and management capabilities to adopt innovation in products & delivery channels. All the prospective investors need to gain deep understanding of the local microfinance banking industry vis-à-vis its performance & potential, and challenges & incentives. Moreover, the promoters of prospective MFBs should also dedicate adequate time and energies to explore the learning and innovations that are occurring rapidly across the globe.
1. The Licensing, Regulatory & Supervisory Agency
The licensing, regulation and supervision of MFBs established under MFIs Ordinance 2001 has been entrusted to State Bank of Pakistan. No institution/person can commence operations as Microfinance Bank unless granted license by the State Bank under section 13 of the MFIs Ordinance 2001.
2. Structure of Licensing Policy
Licensing requirements for establishment of an MFB may be classified into two distinct categories: (a) new MFBs, and (b) Transformation of MFI into a MFB. The requirements for licensing of a new MFB have been given in Section-I. These requirements would apply equally to the MFI intending to transform into MFB. In addition, transforming MFI would also follow additional requirements as laid down in Section-II. The Section-III provides guidance on the process flow of the licensing / transformation relating to MFB. 
I. Requirements for setting up a new MFB and transformation of MFI into a MFB 
II. Additional requirements for transformation of MFI into MFB
III. Process Flow Chart for Grant of License
Section - I

Requirements for setting up new MFB

And transformation of MFI into MFB

1. Who Can Apply for a License for Establishing Microfinance Bank?

i. Institutions
a. Institutions which have demonstrated successful microfinance experience as an MFI locally or globally. Local microfinance institutions (MFIs) can transform their existing MF operations into a MFB (Details are given in section-II).

b. Institutions having large distribution network and / or technology resources.
ii. Person or group of persons
Any person or group of persons, Pakistani or foreign national, having requisite financial and managerial capacity and commitment to the financial sector, have to first establish an MFI for at least three years in order to become eligible for MFB License. However, in extremely exceptional circumstances, where individual sponsors have long exposure/experience of Micro/Agriculture/SME Finance and/or other related areas, SBP may consider them for issuance of an MF Banking License
In all the above cases, the business proposal of the proposed MFB should clearly indicate the commitment towards providing inclusive banking services to the target market and generating funds / deposits for financing portfolio growth.

Note: No group shall be granted a license for establishing more than one MFB. 
2. Ineligibility to Become Sponsors

Any person (s) having any of the following disqualification shall not be eligible to be a Sponsor of MFB:
a) has been convicted by a court of law in Pakistan or abroad for a criminal offence;
b) has been associated with any illegal activity especially contravention of banking and corporate laws.|

c) has failed to meet his/her obligations to banks and other financial institutions. The Sponsors/Directors shall furnish names of the banks/DFIs and their branches with which they have had dealings along with the reports from such Banks/DFIs.

d) has defaulted in payment of taxes- each director and sponsor shall indicate his/her National Tax Numbers.

e) is or has been associated as Director/Chief Executive with the Corporate Bodies whose corporate and tax record including customs duties, central excise and sales tax has been unsatisfactory. They shall name the corporate bodies, their bankers and disclose their tax numbers and dividend record. Those not so associated with Corporate Bodies would be required to indicate their occupation/profession/trade and highlight their achievements.

f) is member/office bearer of any political party or member of Senate, National/Provincial assembly/assemblies

g) In the opinion of the sanctioning authority maintains adverse reputation regarding integrity and performance.
3. Minimum Capital Requirement:

No MFB shall commence business as a microfinance bank unless it has a minimum capital as given below:-
i. Nation wide MFBs:     minimum paid-up capital of Rs.1,000 million
ii. Province wide MFBs:     minimum paid-up capital of Rs.500 million
iii. Region wide MFBs:      minimum paid-up capital of Rs. 400 million
iv. District wide MFBs:     minimum paid-up capital of Rs.300 million
The minimum paid up capital (free of losses) as prescribed above is required to be maintained at all times.
4. Capital Adequacy Ratio:
The MFBs shall also maintain Capital Adequacy Ratio (CAR) equivalent to at least 15% of their risk-weighted assets. For the purpose of maintaining minimum CAR, MFBs are also allowed to raise sub-ordinated debt in local currency, subject to obtaining prior written approval from the SBP. Instructions on calculation of CAR based on risk weighted assets, and the terms and conditions for raising sub-ordinated debt are provided in the BSD Circular No. 7 of 2008 , as amended from time to time.
5. Minimum Contribution by Sponsors
The promoters or sponsor members shall subscribe at least 51% of the minimum capital and the shares subscribed to by the sponsors shall remain in the custody of CDC and shall not be transferable nor shall encumbrance of any kind be created thereon without prior permission in writing from SBP. The bank’s sponsor shares (sponsor shares mean 5% or more paid up shares of an MFB) shall remain deposited in blocked account with Central Depository Company of Pakistan Limited (CDC) in terms of BPRD Circular No. 9 of 2009, as amended from time to time.
6. Net Worth of Sponsor Directors
The declared personal net worth of sponsor directors shall not be less than the amount to be subscribed by them personally. The net worth needs to be supported by a duly authenticated copy of the latest Wealth Statement filed with the Taxation Department. In case sponsor directors residing in countries where filing of Wealth Statement is not a requirement of law, a certificate of Personal Net Worth and General Reputation issued by an international bank of repute would be acceptable. This facility would also be available to applicants who had returned to Pakistan within six months before the submission of application for grant of license. 

The institutions interested in sponsoring an MFB either individually or in collaboration with other persons shall submit a resolution of their respective Boards/Governing Bodies covering followings:
i. Objectives of proposed investment

ii. Amount to be subscribed, and 

iii. Nomination of Directors representing the institution on the MFB Board.
In addition to the Board’s resolution, sponsoring institutions shall also submit latest audited financial statements along with the auditors’ opinion on the financial repute and capacity of the institution to make the proposed investment in the MFB.
7. Public Floatation of Share Capital
In case the sponsors are interested in raising some capital through public floatation of the share capital, a firm commitment from ‘A’ rated underwriting firms to underwrite the public floatation shall be submitted along with the application for grant of license.
8. Foreign Investment
Foreign investors can establish Microfinance Banks either in whole and / or in partnership with local investors. The foreign investments shall be governed in accordance with the Foreign Investment Policy of Government of Pakistan.
9. Fit & Proper Criteria for Board of Directors / CEO
The MFB shall have to meet all necessary requirements for their directors and CEO, as laid down in the Fit & Proper Criteria, prescribed by SBP from time to time (BSD Circular No. 2 of 2005/Prudential Regulation No. 26). The MFB shall also meet all other provisions of aforesaid criteria. 
10. Information/Documents to be submitted with the Application

The application shall be submitted on the format prescribed by SBP, and is given at Annexure-I. The sponsors shall submit following information/documents with the application:
i. Sponsors' commitment to subscribe the prescribed capital.

ii. Detailed CVs and proforma information of the Chief Executive and proposed directors in light of Fit & Proper criteria issued by SBP as given under Prudential Regulation No. 26 

iii. Organizational structure of the proposed MFB

iv. Commitment letters from the Sponsors/Directors, Chief Executive and Members of senior Management team to subscribe the committed capital and serve in their respective positions.

v. Job descriptions and detailed CVs of the senior management team 

vi. Detailed Feasibility Study based on the actual survey of the target market. The findings of survey should highlight the viability of MF banking proposal, design of products, and service delivery channels. 

vii. A detailed work plan for mobilizing funds (especially core deposits) to support the loans growth.

viii. Financial projections for 5 years based on assumptions which realistically reflect sponsors’ capacity, sector’s conditions, and future outlook. 

ix. Short term and long term business plans to support financial projections. The plan should highlight the salient features of the proposed business model, growth strategy, use of technology options, MIS, and HR development. 

x. The draft Memorandum and Articles of Association of the MFB and the proposed name;
11. Application Processing Fee:
The applicant shall deposit a sum of Rs. 1,000,000/= (Rupees one million) or equivalent in US dollars along with the application as processing fee. The fee so deposited shall be non-refundable. Incomplete applications shall neither be entertained nor returned. The processing fee in such cases shall also be non-refundable. The fee may be deposited through demand draft or pay order.
Section - II

Additional requirements for transformation of MFI into MFB

The MFIs (NGOs, RSPs, etc.) have played an important role especially in the initial development of microfinance sector. These MFIs continue to be significant players in the sector today. The legal framework acknowledges their contribution to the sector and encourages the MFIs having requisite capacity to transform into Microfinance Banks (MFBs). The licensing criteria for establishing Microfinance Banks allows MFIs having potential and capacity to contribute up to 50% of the required capital in the form of credit and other assets portfolio subject to review by a Chartered Accountancy Firm from amongst the SBP panel. 

To facilitate the MFIs in their transformation process, this section highlights various aspects of the transformation and prescribes essential requirements to be completed for the transformation. However for complete details in this regard,transformation guidelines may be referred. The MFIs may apply additional processes to assess their capacity to transform and ensure a smooth transition from a non-profit oriented and unregulated to profit oriented and regulated financial institution for the poor.

1. Underlying Reasons for Transformation

Transformation from MFIs to MFB is a major shift from a non-profit, socially motivated and donor dependent institution to profit oriented, self-reliant and regulated financial institution, which involves cultural, organizational, operational and financial transformation. Normally one or all of the following objectives leads to the transformation decision: (a) Access to commercial capital, (b) Portfolio growth, and (c) Product diversification.
2. Transformation Cost & Transformation Continuum

The transformation involves substantial cost including pre-transformation cost, regulatory requirements, taxation cost, vulnerability to external shocks etc. Hence, the decision to transform should be carefully evaluated keeping in view all the associated cost and expected benefits. The global experiences show that the successful transformations take place in a gradual process which essentially includes following milestones:
i. Adequate experience as MFI and achieving reasonable operational size & scale in terms of credit portfolio and service delivery network, reliable accounting & information system, establishment of internal audit function, review of books of accounts by external auditors etc

ii. Adoption of professional, business like approach to manage the MFI's operations and offering demand driven products/services at cost recovery basis; 

iii. Achieved full operational sustainability and satisfactory progress towards achieving financial self-sufficiency

iv. Ability to access private risk capital and market based funds for sustainable growth

v. Prepare to operate as profit oriented financial institution subject to prudential regulations/supervision

vi. Have acquired /developed reliable software to support the existing operations. 

vii. Preferably be rated by a reputed credit rating agency. 

The MFIs willing to transform into MFB should assess their respective positions in the transformation process and accordingly decide to proceed further. 
3. Governance Structure
The auditors/consultants shall review the governance structure of the MFIs, the composition of its Board of Directors/Governing Body, the criteria & eligibility for election/selection as directors, the capacity and understanding of the Board about MF dynamics, the members’ commitment with the mission and objectives of the MFIs and their willingness as well as capacity to contribute resources/funds to the new entity’s capital. They shall also review the decision making process in MFIs and the role and effectiveness of the Board in developing professional and business like environment and culture in the MFI. Further, the auditors/consultants shall recommend changes, if any, required in the composition and skill mix of the Board keeping in view the objectives that an MFI would set in terms of its transformation into an MFB. The recommendations would also take into account the legal and regulatory requirements.

4. Recommendation for Transformation
In addition to the findings of institutional assessment, the auditors/consultants shall exercise an objective analysis of macroeconomic conditions, legal and regulatory environment for the MF sector, and future outlook of the sector. Based on this thorough analysis, auditors/consultants shall recommend that whether the MFIs should go for transformation. They shall also advise on the future course of action if they recommend in favor of transformation.

5. Transformation Decision
The MFIs’ Board on receipt of the institutional assessment report by audit/consulting team, shall review the report and its recommendations and make a decision to go for transformation or otherwise. In case of decision in favor of transformation, the Board shall authorize preparation of proposal and application for submission to State Bank of Pakistan for grant of license to operate as Microfinance Bank under MFIs Ordinance 2001. The resolution of the Board shall also be submitted to SBP along with other documents. In preparing the proposal, the MFI must review the requirements as laid down in Section – I.
6. Information/Documents for Submission

The MFI shall submit the application as per the procedure given in the Section-I. The additional requirements in the application are given as follows:
i. The application should be duly filled-in and signed by the person as authorized by the board of MFI 

ii. Institutional Assessment Report prepared and completed as per the guidelines given in above paragraphs

iii. Board Resolution to go for transformation along with its objectives 

iv. Detail of assets & liabilities to be transferred to the MFB - the transfer shall be admissible at value assessed/determined by the audit/consulting team during institutional assessment phase
Section - III

Process Flow Chart
1. NOC for Incorporation with SECP
The sponsors shall submit the application complete in all respect including the processing fee to the Director, Banking Policy & Regulations Department, State Bank of Pakistan, Karachi for grant of license to operate as MFB. The State Bank shall process the application and if satisfied with the quality of the proposal of the proposed MFB, shall issue NOC to the sponsors for incorporation of the proposed bank as a public limited company. In case of weaknesses in the proposal and / or incomplete information, the sponsors will be given an opportunity to improve the proposal and take steps to address the concerns raised by SBP. The NOC will be issued if proposal etc. is improved to the satisfaction of SBP; the application will be declined otherwise.
2. Grant of License
After receiving NOC, the sponsors shall apply to SECP for incorporation as public limited company. After incorporation of the company, the sponsors shall submit the incorporation certificate to SBP. The State Bank shall grant the license subject to receipt of clearance from security agencies and CBR etc.
3. Commencement of Business
The MFB shall commence operations within six months of the grant of license by SBP. After grant of license the sponsors shall subscribe the committed capital and obtain certificate of commencement of business from SECP. The licensed MFB shall then apply to SBP for grant of licenses for opening branches/places of business under branch licensing policy for MFBs.
4. Compliance with Legal Framework & Prudential Regulations for MFBs
The company granted license to operate, as MFB shall comply with the provisions of Microfinance Institution Ordinance 2001, Rules/Prudential Regulations framed and SBP directives issued/to be issued from time to time
Annexure I

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