Pakistan: Shaping a Responsible Finance Vision for the Microfinance Industry
The Pakistan Microfinance Network (PMN) case is firmly rooted in the self-regulation pillar but with a strategy that incorporates all three pillars.
Since 2009, the Pakistan Microfinance Network (PMN) has put in place a sector-level responsible finance initiative that includes: (1) information bureaus (credit clients, staff, and branch mapping), (2) client protection, (3) social performance, and (4) financial literacy. These initiatives were urged on by evidence from PMN research on the high degree of client over-indebtedness, the increased credit risk for MFPs, and a weakening of lender-borrower relationships, all consequence of intense competition among MFPs during a period of rapid growth from 2002–07. In a similar crisis in 2010 in the Pattoki district in Punjab, the PMN and its members concluded that client indebtedness and eroding portfolio at risk (PAR) had become an ongoing reality nationwide, and was even more entrenched in some of the country’s more competitive markets for microfinance.
PMN is well placed to carry out responsible finance initiatives because of the trust placed in it by its members and the support and recognition of crucial industry stakeholders, such as donors, the industry apex (Pakistan Poverty Alleviation Fund [PPAF]) and the central bank (State Bank of Pakistan [SBP]). Among the first proactive efforts in responsible finance, PMN’s initiatives are being taken forward and deepened through its business plan for 2013–17. PMN’s initiatives are based on the three-pillar strategy, with a focus on industry self-regulation.
Information Bureaus: As a result of a successful two-year pilot begun in 2010, a microfinance-specific credit information bureau is being rolled out nationwide in collaboration with IFC under a three-year plan. There are 2.2 million micro-borrowers in the country about whom 1.6 million records have been collected, and the remaining micro-borrowers are expected to be completed soon. In the second quarter of 2012, 46,000 inquiries were made with a hit rate[i] of 71 percent. PMN analysis shows that MFIs’ rejection rate of loan applications has gone up by 15 to 20 percent as a result of use of this bureau. In addition, the bureau is helping MFIs design more appropriate products because they are now in a better position to gauge debt burdens and credit capacity of borrowers.
The PMN also runs a microfinance staff reference bureau. This bureau, launched in August 2010, helps flag staff members who have committed fraudulent behavior, embezzlement, or other coercive practices. This bureau is especially useful in a country where the legal recourse mechanism is fraught with challenges. The bureau offers a closed-group platform on which information on staff wrongdoing can be shared with other microfinance institutions. It also sends a strong message at the field level that there is low tolerance for such practices. So far, 44 cases have been reported to the bureau.
The third quasibureau set up by PMN is the “MicroEYE” software available on the PMN website that maps every microfinance branch location in the country through an online format powered by Google Maps. The purpose is to avoid crowding branches into a few locations, which has led to unhealthy practices and issues of over-indebtedness, client protection, and staff poaching. The map also helps identify areas that have few microfinance services and enables balanced outreach. Pakistan microfinance provision is clustered in urban localities and east of the Indus River, whereas the western part of the country has little to no access to microfinance. This software was launched in February 2012 and by December 2012 was receiving more than 150 hits per month.
Consumer Protection: The consumer protection initiative began with a code of conduct for consumer protection that was signed voluntarily by PMN’s entire membership in early 2009. Since then, PMN has moved forward in four implementation areas:
- Dissemination of client rights and responsibilities messages to the clients of microfinance through a staggered communications campaign. The first component of this campaign, a print campaign via microfinance institutions’ branches, has been completed.
- Work on pricing transparency in the Pakistan microfinance industry in collaboration with MFTransparency an international organization that promotes transparent pricing in the microfinance world, in 2013.
- Client protection assessments of all member MFPs to help offer a roadmap to improve client protection practices in collaboration with the Smart Campaign during 2013–15.
- Advocacy with member MFIs to put in place client grievance mechanisms, as well as advocacy with industry stakeholders for setting up a third-party grievance redress mechanism for the microfinance industry in Pakistan.
Social Performance: PMN has taken several strides toward mainstreaming social performance (SP) management practices within member institutions, including encouraging since 2009 all members to report on social performance to the MiX Market, an international nonprofit that reports social performance measurements for microfinance institutions globally. By 2012, 100 percent of PMN members were reporting their MiX Social Performance Standards. PMN has been performing validation of its members’ data for the past two years in collaboration with MiX Market, for enhanced transparency and reliability of data reported. This data culminates in a biennial “Social Performance State of the Sector Report.” PMN promotes active involvement of its members on social performance issues through an SP working group, and more recently by developing a four-year SP strategy with three main components:
- Awareness Raising: dissemination of information related to SP initiatives to MFPs and other industry stakeholders such as external social auditors, networks, institutions, the State Bank of Pakistan, and the Pakistan Poverty Alleviation Fund.
- Social Transparency: promotion of tools for reporting on SP indicators to external stakeholders and social auditors and rating agencies and strengthening poverty measurement in the sector.
- Implementation: collaborating with MFPs to build roadmaps for compliance to universal standards for social performance management, building capacity of MFPs’ data management systems to include poverty, and impact data management for better decision making and review.
- PMN is engaging in a social performance management implementation project in 2013–14, with support from the Microfinance Center in Poland and the Ford Foundation. This project will contribute to the network’s wider SP strategy, ultimately leading to institutionalization of social performance management at MFPs with a double bottom line vision.
PMN is engaging in a social performance management implementation project in 2013–14, with support from the Microfinance Center in Poland and the Ford Foundation. This project will contribute to the network’s wider SP strategy, ultimately leading to institutionalization of social performance management at MFPs with a double bottom line vision.
Financial Literacy: PMN has been collaborating with industry players active in the field by providing input and a short-term supply-side analysis toward the National Financial Literacy Program run by the central bank. PMN has also recently completed curriculum development for a financial literacy initiative for the biggest social safety net program in the country. Going forward (2013–17), PMN is planning a microfinance industry-wide financial literacy campaign targeting lower microfinance staff and ultimately, microfinance clients.
PMN is in the preliminary stage of most activities. However, the process of evidence-based decision making and joint local action on global initiatives has shaped a responsible finance vision for Pakistan’s microfinance institutions. These partnerships help build credibility for PMN’s work and help win acceptance for and build confidence in its members. The PMN has solicited support for some initiatives from the State Bank of Pakistan and the Pakistan Poverty Alleviation Fund. Funding from these sources would send a signal to local microfinance industry of the importance ascribed to these efforts by local policymakers, thus compelling more MFP participation.
PMN’s interventions focus on building a healthy microfinance sector through responsible, sustainable institutions serving the market. Benefits of these activities to microfinance institutions include:
- Customer loyalty as a result of a better relationship with microfinance clients and a long- term and sound means to a more robust microfinance sector. Within such an environment, it will become difficult for local activists and others to create problems for the industry, which is what happened in previous delinquency crises;
- Well-informed clients that act responsibly and become better financial managers;
- More client information available to each microfinance institution, helping them to offer better products, manage staff and deliver effectively on the ground;
- Open sharing of information that leads to healthy competition, especially in terms of transparent and uniform pricing disclosures;
- A more level playing field among MFPs. Building compliance with industry client protection standards and transparency in pricing disclosures levels the playing field between bank MFPs and nonbank MFPs, who currently are not regulated. The regulated segment of the market is now at a disadvantage to nonbank players because regulations require many client protection and disclosure requirements, which unregulated nonbank players are not obliged to follow;
- Elimination of the need for restrictive regulations that do not contribute to creating a level playing field that benefits customers, responsible providers, and the industry;
- Creation of a positive reputation for the industry at the local and international levels.