Tameer Bank’s Pres­i­dent speaks

Southasia - - FRONT PAGE -

What is the mi­cro­fi­nance out­reach in South Asia?

It dif­fers from coun­try to coun­try. In Pak­istan we have an out­reach of about 3.1 mil­lion. Bangladesh has the high­est out­reach. The coun­try has three mi­cro­fi­nance in­sti­tu­tions with an out­reach of 10 mil­lion each. In In­dia, the out­reach in terms of ab­so­lute num­bers is in ex­cess of 30 mil­lion peo­ple.

How­ever, if you look at the fig­ure as a per­cent­age of po­ten­tial mar­ket then the pen­e­tra­tion is low in all coun­tries in­clud­ing Pak­istan - es­pe­cially in Pak­istan – where it is 3.1 mil­lion against the mar­ket of 30 mil­lion. That makes the pen­e­tra­tion only 10 per­cent.

Why is the pen­e­tra­tion so low?

Mi­cro­fi­nance has its own chal­lenges. It takes time to de­velop. In Pak­istan’s con­text, the pos­i­tive fea­ture is that the State Bank of Pak­istan has spe­cial reg­u­la­tions for the mi­cro­fi­nance sec­tor. None of the other South Asian coun­tries have it. There are no mi­cro­fi­nance spe­cific banks in Bangladesh and In­dia while in Pak­istan there are eight mi­cro­fi­nance banks sched­uled and li­censed by the SBP.

How­ever, the in­dus­try split be­tween banks and what we call mi­cro­fi­nance in­sti­tu­tions is half and half. The mi­cro­fi­nance in­sti­tu­tions (MFIs) are reg­u­lated by the SECP. The chal­lenge for the MFIs is fund­ing. They don’t have enough cap­i­tal and fund­ing avail­able to meet the cus­tomer de­mand. The chal­lenge for the banks is dis­tri­bu­tion and a net­work that is large enough to meet the needs of the cus­tomer. But we are get­ting there – with a 30 per­cent in­crease ev­ery year. The per­cent­age looks good con­sid­er­ing the fact that we have started off with a small base, but the ab­so­lute amount is a chal­lenge.

I am also the chair­man of the Pak­istan Mi­cro­fi­nance Net­work. My three-year goal is to in­crease the fig­ure of three mil­lion peo­ple to 10 mil­lion, which will even­tu­ally mean that we are im­pact­ing 50 mil­lion peo­ple as­sum­ing a fam­ily size of five.

What is the re­cov­ery rate?

Uni­ver­sally, the re­cov­ery rate in the mi­cro­fi­nance sec­tor is usu­ally bet­ter as com­pared to com­mer­cial banks. In Pak­istan the re­cov­ery rate is 97 per­cent. The re­cov­ery rates in Bangladesh and In­dia are also good -- around 97-99 per­cent.

The rea­son is this sec­tor caters to the sec­tion of so­ci­ety which is most con­cerned about its honor. They don’t want to fall prey to money lenders or arhatis whose in­ter­est rate is usu­ally 300 to 400 per­cent. The chal­lenge in the mi­cro­fi­nance sec­tor is not the re­cov­ery rate but the business model that al­lows a bank to sell a small loan which has high scru­tiny re­quire­ments. A com­mer­cial bank can give out a loan of, say, five mil­lion or 50 mil­lion since it has a bal­ance sheet, rat­ing re­port, in­come state­ment and bro­ker’s re­port. Mi­cro­fi­nance cus­tomers don’t have any of th­ese.

So the bank has to go to a cus­tomer and re­build his in­come state­ment. This means one loan at a time. A re­la­tion­ship man­ager goes and fig­ures out what the cus­tomer’s in­come and ex­penses are. Then a ver­i­fi­ca­tion of­fi­cer goes and ver­i­fies the fig­ures. It all needs a business model that can ab­sorb the cost and cre­ate an in­ter­est rate that is ac­cept­able to the cus­tomer. So de­fault is not a chal­lenge. Fund­ing and scale is the chal­lenge.

Is it true that the mark-up on mi­cro­fi­nance is higher than on nor­mal loans? If yes, why?

It is easy to say that mark-ups are high. What mar­gins do mi­cro­fi­nance banks op­er­ate at? They op­er­ate at a mar­gin of three or four per­cent while the ef­fec­tive in­ter­est rate for a cus­tomer is 30 per­cent. But only four per­cent in the 30 per­cent is the profit. The rest is cost of fund – when you lend some­one money, you have to bor­row it first. The de­pos­i­tors of mi­cro­fi­nance banks ex­pect bet­ter rates than a com­mer­cial bank be­cause of the small size of the MFB. Then the cost of ad­min­is­tra­tion, which is usu­ally three to four per­cent in com­mer­cial banks, is 13 to 14 per­cent in MFBs be­cause ev­ery loan is to be done one loan at a time. Add to it other costs and you have the fig­ure of 30 per­cent. But the cus­tomer of a mi­cro­fi­nance bank ac­cepts the high rate be­cause he or she can pass on that cost on their prod­uct to their cus­tomers. They are more con­cerned about the size of the monthly in­stall­ment and whether they can pay off that in­stall­ment with their monthly in­come.

What are the chal­lenges that hin­der the growth of the mi­cro­fi­nance sec­tor in South Asia?

The big­gest chal­lenge is lack of aware­ness. Peo­ple do not know what fa­cil­i­ties they can avail. We have to see how we can use the fi­nan­cial rail­roads to our ad­van­tage. In Pak­istan, In­dia and Bangladesh, the tele­phone den­sity is good and

ranges be­tween 60 to 80 per­cent. The bank­ing den­sity on the other hand is 15 per­cent. The majority of the peo­ple in th­ese coun­tries have pre-paid con­nec­tions. In or­der to stay con­nected, they buy scratch cards to recharge their mo­bile phones. We need to take ad­van­tage of the tele-den­sity to in­crease the bank­ing den­sity. It is dif­fi­cult to con­vince peo­ple to go to a bank and open their ac­count but if you tell them that they can open their ac­count by vis­it­ing the nearby ‘easy­paisa’ agent they will agree. We need to di­rect our bank­ing den­sity to­wards tele-den­sity.

Se­condly, reg­u­la­tions are a big chal­lenge in South Asian coun­tries with the ex­cep­tion of Pak­istan. In­dia does not have reg­u­la­tions for mi­cro­fi­nance while in Bangladesh the sec­tor op­er­ates out­side the am­bit of the cen­tral bank. There is also a need to sim­plify reg­u­la­tions.

The third chal­lenge is that of a univer­sal iden­ti­fier. In Pak­istan, there are Nadra iden­tity cards but other coun­tries don’t have such form of doc­u­men­ta­tion. In­dia started an Aad­haar card but it does not have real-time ver­i­fi­ca­tion. On­line, re­al­time ver­i­fi­ca­tion is a huge fa­cil­ity as it en­sures 100 per­cent ver­i­fi­ca­tion.

Lastly, there is a need to im­prove con­sumer pro­tec­tion. The con­sumers of con­ven­tional banks are more re­source­ful as com­pared to con­sumers of mi­cro­fi­nance banks and have more av­enues to lodge their bank-re­lated com­plaints. How­ever, if a mi­cro­fi­nance con­sumer is fac­ing trou­ble with re­spect to money trans­ac­tions, where will he go for re­dress of his prob­lem? Mi­cro­fi­nance banks have call cen­ters but the cus­tomer re­dress sys­tem should be made more ef­fec­tive.

In the South Asian con­text, what are some of the main fi­nan­cial prod­ucts that are pro­vided un­der the um­brella of mi­cro­fi­nance?

There are two lend­ing method­olo­gies in South Asia - group lend­ing and in­di­vid­ual lend­ing. In the group lend­ing method, groups of peo­ple cross-guar­an­tee each other for a loan. In the event of one mem­ber de­fault­ing on his loan, other mem­bers pay on his be­half. The Grameen Bank

fol­lows this model.

In Pak­istan, there is 80 per­cent group lend­ing and 20 per­cent in­di­vid­ual lend­ing. Tameer Bank, how­ever, has a port­fo­lio of 80 per­cent in­di­vid­ual lend­ing and 20 per­cent group lend­ing so it op­er­ates the other way round. The fi­nan­cial ser­vices of­fered by the bank are many. We have the Karo­bar Loan, Agri-Fi­nanc­ing, Dairy Fi­nanc­ing, Apni Chhat Loan, White Goods Loan, etc.

We are more fo­cused on fi­nan­cial in­clu­sion now. Fi­nan­cial in­clu­sion means the peo­ple who are in the bank­ing or in­surance net. In Pak­istan there are only six mil­lion peo­ple who have a credit fa­cil­ity from the en­tire bank­ing sec­tor. Among the six mil­lion, three mil­lion are cov­ered by the mi­cro­fi­nance banks in only 15 ci­ties. Eighty-five per­cent of the peo­ple of Pak­istan are out­side the bank­ing net. They don’t have bank ac­counts and do not have ac­cess to fi­nan­cial ser­vices. This num­ber is not markedly dif­fer­ent in Bangladesh or In­dia.

Luck­ily in Pak­istan, cer­tain fac­tors fa­cil­i­tate the process of open­ing a bank ac­count. For ex­am­ple, we have a cen­tral­ized data­bank in the form of Nadra from where data can be ver­i­fied. Tameer Bank is in the process of in­tro­duc­ing the bio­met­ric ver­i­fi­ca­tion sys­tem in which all a per­son has to do is record his thumb im­pres­sion at any easy­paisa shop and his bank ac­count will be opened. There are no re­stric­tions such as min­i­mum bal­ance or monthly bal­ance.

Will fi­nan­cial in­clu­sion en­sure that peo­ple will also be at­tracted to­wards other fa­cil­i­ties of­fered by banks such as health in­surance, life in­surance etc?

It de­pends on aware­ness. We have started cre­at­ing aware­ness about our health in­surance scheme. In Pak­istan, only those peo­ple have health in­surance who are em­ployed by a company. Peo­ple who work as do­mes­tic help don’t have health in­surance. Why not? It is be­cause in­surance com­pa­nies can’t make a dis­tri­bu­tion net­work wide enough to reach ev­ery per­son.

What Tameer Bank has done is - and this is be­ing done in In­dia as

There is a view that mi­cro­fi­nance elim­i­nates poverty. It doesn’t. Mi­cro­fi­nance is one as­pect or one tool used in com­bi­na­tion with ed­u­ca­tion, health and other as­pects to re­duce poverty. It doesn’t elim­i­nate poverty. It cre­ates safety nets for peo­ple not to fall be­low the poverty line.

well - it of­fers in­surance of Rs.50,000 with an an­nual pre­mium of Rs.550. All a per­son has to do is go to our agent and tell him that he wants health in­surance. Un­der the health in­surance scheme, you can get treated at the hos­pi­tals that are on the bank’s panel.

We are try­ing to in­clude all our easy­paisa agents in the net­work by June 2015. This will en­able peo­ple to open ac­counts, de­posit their money and buy in­surance from the 50,000 branches across the coun­try. Cur­rently, com­mer­cial banks have 12,000 branches in Pak­istan while Tameer Bank has 50,000 lo­ca­tions which are open seven days a week. This is a fi­nan­cial revo­lu­tion. If we suc­ceed, we can change the bank­ing in­dus­try in the next five years.

Has mi­cro­fi­nance helped in al­le­vi­at­ing poverty?

It has. There is a view that mi­cro­fi­nance elim­i­nates poverty. It doesn’t. Mi­cro­fi­nance is one as­pect or one tool used in com­bi­na­tion with ed­u­ca­tion, health and other as­pects to re­duce poverty. It doesn’t elim­i­nate poverty. It cre­ates safety nets for peo­ple not to fall be­low the poverty line.

What is the fu­ture of mi­cro­fi­nance in South Asia?

It is very bright. In In­dia, Pak­istan and Bangladesh, com­mer­cial banks are pro­vid­ing fi­nan­cial ser­vices to a very limited num­ber of peo­ple, es­pe­cially on the credit side. Sim­i­larly, the net­work of in­surance com­pa­nies is re­stricted to ur­ban ar­eas. Their pen­e­tra­tion in ru­ral ar­eas is neg­li­gi­ble. The ur­ban vs. ru­ral as well as the in­come di­vides are too wide. But the peo­ple who are out of this net of­fer a huge mar­ket to those who can make a business model us­ing ei­ther branch­less bank­ing or con­ven­tional mi­cro­fi­nance. Branch­less bank­ing will wit­ness a sub­stan­tial in­crease in three to five years in South Asia, es­pe­cially in Pak­istan, In­dia and Bangladesh.

What steps are re­quired for the growth of mi­cro­fi­nance in South Asia?

There should be a na­tional fi­nan­cial in­clu­sion pro­gram in all South Asian coun­tries. In Pak­istan, the State Bank is go­ing to un­der­take such a pro­gram. It is needed be­cause although the pri­vate sec­tor is play­ing its role in the mi­cro­fi­nance sec­tor, the par­tic­i­pa­tion of the gov­ern­ment is re­quired and is equally im­por­tant. Pub­lic-pri­vate part­ner­ship is the need of the hour. This model has been suc­cess­fully im­ple­mented in Bangladesh where a num­ber of vil­lages have been pro­vided so­lar pan­els un­der a pub­lic-pri­vate part­ner­ship pro­gram.

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