Chapter 9: Microfinance Banks

Usman Sufi
  These FIs are given license by SBP
 Banking Companies Ordinance does not apply to micro finance
What are bank

Microfinance  These should be counted among DFIs

 Seven MFBs are operating in Pakistan
Banks?  Strictly speaking these FIs do not indulge in all the services
provided by a commercial bank
  The First Micro Finance Bank
 Tameer Micro Finance Bank
 Pak-Oman Micro Finance Bank
 NRSP Micro Finance Bank
Microfinance  Kashf Micro Finance Bank
banks in  Apna Micro Finance Bank
Pakistan  Rozgar Micro Finance Bank
 Waseela Micro Finance bank
 7 banks, out of which 5 have nationwide licences and 2 have
district licences
  Three types of Micro Finance Banks can be established under
MFIs Ordinance 2001
 the countrywide Micro Finance Banks (minimum capital Rs.
500m)
 Province-wide Micro Finance Banks (minimum capital Rs.

Types of 250m)
 district-wide Micro Finance Banks (minimum capital Rs. 100m)
Microfinance  The regulatory framework also provides the scope for NGO-
banks MFIs to transform themselves into regulated Micro Finance
Banks provided they meet the requisite criteria
 SBP has developed detailed criteria for grant of licenses under
MFIs Ordinance and it is available at SBP website
 Rozgar MFB is the latest entrant; and it has district wide license
to operate in Karachi
  Maximum Loan Size - The MFB/MFI cannot extend loans
exceeding Rs.100,000 rupees to a single borrower
 Statutory Reserves in OE - The MFB/MFI are required to
Maximum create a reserve fund in RE portion of its OE
Loan Size and  it must transfer an amount equal to at least 20% of its annual
Statutory profits after taxes to this reserve

Reserves  till such time that the reserve fund equals the paid-up capital of
the MFB/MFI
 The requirement changes to 5% after that
  The MFB/MFI must maintain a cash reserve on asset side of its
balance sheet that must be equivalent to at least 5% of its Time
Maintainence of and Demand Liabilities

Cash Reserve  this amount is kept by MFB in a current account opened with
the State Bank or its agent
and Liquidity:  MFB must also maintain liquidity reserve on asset side
Liquid Assets equivalent to at least 10% of its time and demand liabilities in
the form of liquid assets
  The MFB/MFI are required to establish and maintain a
Depositors Depositors’ Protection Fund for the purpose of mitigating risk
of its depositors
protection fund:  Bank must credit not less than 5% of its annual profit after
On Asset Side taxes to this fund
  MFB/MFI cannot give loans for speculative purposes such as
investing in shares;
 It also cannot give loans to any of its sponsors including
Restrictions on members of its board of directors and their relatives

certain types of  MFB cannot enter into leasing, renting and sale or purchase of
any kind with its directors, officers, employees or any person
transactions who own 5% or more of the equity of the MFB/MFI
 MFB cannot deal in real estate except for use of MFB/MFI
itself
  Investment in shares of any corporation is allowed as long as
objective is to provide microfinance services to poor
 The maximum investment by MFB in shares of a company
cannot exceed 15% of paid-up share capital of that company

Investment in  or 15% of MFBs’ own equity free of losses

 whichever is less
corporate shares  For making investment in excess of the 15% limit, prior
permission from SBP is required
  MFBs must write-off , that is, remove from asset side of
balance sheet, all NPLs (non performing loans) one year after
Writing off the default in performance of these loans

NPLs  But MFB’s right of recovery of such written off loans still is
there
  If payment is late by 30 days on a loan then such loan is
classified as Non- Performing Loans (NPLs
 Further the NPLs must be divided into following categories:
 Loans in arrears: These are loans on which
payments/installments are overdue for 30 days or more but less
Classification of than 90 days

NPLs  Substandard Loans: payments/installments are overdue for 90

days or more but less than 180 days
 Doubtful: payments/installments are overdue for 180 days or
more but less than 365 days
 Loss: payments/installments are overdue for 365 days or more
  General Provision: The MFB/MFI must record in income
statement as estimated bad debt losses a General Provision
equivalent to 2% of the net outstanding advances
 Net outstanding advances = advances - specific provisions
 Specific Provisions: In addition to the general provision, the
Provisioning MFB/MFI is required to make specific provisions against NPLs
at the following rates
requirements of  Loan in arrears: No Provision required
NPLs  Substandard Loans: 20% of outstanding principal net of cash
collaterals given by the borrower
 Doubtful Loans: 50% of outstanding principal net of cash
collaterals
 Loss: 100% of outstanding principal net of cash collaterals
  The MFB/MFIs are required to report on their balance sheets
the value of its investments in securities on mark-to-market
basis
Reporting  However, in case of investment in securities & other assets

investments in where active market does not exist, the MFB/MFI can make
subjective evaluation of the value of such investments
other Assets  To determine their quality, category of classification, and
provisions required, keeping in view the risk involved and the
requirements of international accounting standards
  Given the inflationary environment prevailing in Pakistan, it
seems that the upper limit of 100,000 rupees on loan amount is
too small to start any realistic business venture. Proposals are
Home under consideration to increase upper limit of the loan amount

Assignment  Has this upper limit revised? If yes, what is it now? And Do
you think its sufficient? Explain your answer