Tameer Bank’s President speaks
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.