PMN asks PBA to get WHT exemption for microfinance sector

Pakistan Microfinance Network (PMN) has asked Pakistan Banks Association (PBA) to convince the government to exempt 0.3 percent withholding tax (WHT) for microfinance and branchless banking sector to continue its constant growth in the future.

The imposition of 0.3 percent WHT for banking transaction has increased the cost of administration by microfinance banks whereas it hurt equally the growth of lending to customers. Microfinance banks lend Rs 150,000 to a big majority of borrowers but it is being taxed at source increasing the burden on the small entrepreneurs whom is already paying huge interest rates to banks.

The microfinance sector and branchless banking sector are two key drivers of financial inclusion which was planned by State Bank of Pakistan (SBP) with stakeholders for streamlining banked and documented economy. The newly imposed tax is big damaged to process of financial inclusion being set by the central bank with microfi- nance bank, said Nadeem Hussain Chairman Pakistan Microfinance Network.

"I have written a letter to PBA for convincing the Federal Board of Revenue (FBR) and the government to exempt microfinance and branchless banking sector from the tax", he added. Recently, the central bank asked microfinance banks to reduce their loan exposure ceiling in companies and individuals having loans against gold as collateral to the extent of 35 percent of its gross loan portfolio.

The central bank has already imposed limits for microfinance banks related to regulations including revision of Tier-1 capital and Common Equity Tier 1 and Additional Tier-1 components. Besides, a floor of 20% Risk weight has been introduced for financing against gold.

The bank has introduced an Operational Risk Capital Charge @ 3% of average Gross Income has been introduced. It has enhanced the benefit of benefit of revaluation reserve from 50% to 100%. The deferred Tax Assets will be deducted from capital in a phased manner @ 25% per annum starting from December 31, 2015 with full deduction from December 31, 2018.

Bankers at microfinance banks said the government taxes and central banks regula- tions were made extremely challenging environment for the banks to flourish at handsome pace. They added that the restrictions along with tax obligation will not bode well for the penetration of microfinance banks to increasing their borrowers-base countrywide because three out of ten banks are in profit at present whereas rest of them are struggling for breakeven.

They were of the view that the central bank's regulation was biased for microfinance banks which even was not imposed on commercial banks with huge reserves and liquidity. Pakistan's Microfinance Banking industry has expanding every month with increasing operations of microfinance banks and Development Finance Institutions (DFIs) as it touched Rs 70 billion as Gross Loan Portfolio, which is 228 percent year than previous year.

According to the statistic of Pakistan Microfinance Network, the values of GLP increased by Rs 13 billion in a year from Rs 57 billion reported in the first quarter of 2014. All key indicators including saving accounts, borrowers and policy holders of micro-insurance were seen terrific growth showing the noticeable penetration of the microfinance banks which are exploring cities and sectors with their innovative financial products and services.