State Bank of Pakistan has been stressing the importance of micro-finance for the last few years. On Wednesday, the 20th June, 2012, it went a step further by setting up micro-finance-exclusive credit information bureau (MF-CIB) in its organisational structure to give a boost to the micro-finance sector. Highlighting the importance of this sector in Pakistan's economy, Governor, SBP, Yaseen Anwar stated that the bureau would help micro-finance banks and micro-finance institutions in developing a robust risk management system, which in turn would reduce the risk of multiple borrowings and loan defaults. As such, the MF-CIB would open access to credit for millions of potential poor borrowers and reduce the credit risk cost of the lenders, besides lowering the loan price for borrowers. At present, even the creditworthy borrowers of micro-finance institutions face difficulties in accessing larger loans due to non-availability of their history of past loans and timely repayments to a micro-finance institution. The MF-CIB could facilitate the "graduation" of such livelihood-based workers into small entrepreneurs. SBP, according to the Governor, had played a sterling role in the development of micro-finance sector as an alternative to conventional banking to serve the lower end of the market. Financial inclusion, which was a core component of SBP's financial sector development strategy, envisages transferring the financial market into an equitable system with efficient market-based financial services to the otherwise excluded - poor and marginalised - population, including women and young people. Pakistan had one of the lowest financial penetration levels in the world, with 56 percent adult population totally excluded, and another 32 percent informally served. We totally agree with the basic idea of State Bank establishing the MF-CIB but are also aware of its limitations. As in the case of existing credit bureau in the SBP, the new bureau would also certainly serve a very useful purpose by identifying the habitual loan defaulters in the micro-finance sector. The raising of red flag in these cases would not only help the micro-finance institutions in refusing loans to applicants with a dubious history but would also oblige these institutions to open access to potential creditworthy borrowers who could play a really useful role in reviving economic activities in the country. The opening of MF-CIB, could also have an indirect impact on alleviation of poverty and creation of more employment opportunities. Since the ratio of loan default in micro-finance in Pakistan is usually higher than in conventional lending, the establishment of such a facility in the SBP was of course long overdue. However, while commending the usefulness of MF-CIB, it needs to be kept in view that State Bank, as a matter of policy, should not be so much concerned about equitable distribution of credit or helping the poorer or marginalised sections of society. While assistance to the poor is a noble idea, it is the proper management of fiscal policy which should carry the burden of a welfare regime and ensuing equity, bank credit must be facilitated to flow to business activities which yield the highest returns to ensure its use in an optimal fashion. Also, the situation, at present, demands that the State Bank must continue to concentrate on ensuring price stability and persuading the government to borrow less from the banking system in order to spare more resources for the private sector credit expansion including for the micro-finance sector. Nobody can refute the importance of micro-finance in the country's economy and the need to remove impediments to its free flow but the nation will be served better if the State Bank continues to accord priority to its primary responsibility of reducing inflationary pressures on the economy and checking sub-optimal use of bank credit.
Tuesday, June 26, 2012
Pakistan: Micro-finance credit bureau
State Bank of Pakistan has been stressing the importance of micro-finance for the last few years. On Wednesday, the 20th June, 2012, it went a step further by setting up micro-finance-exclusive credit information bureau (MF-CIB) in its organisational structure to give a boost to the micro-finance sector. Highlighting the importance of this sector in Pakistan's economy, Governor, SBP, Yaseen Anwar stated that the bureau would help micro-finance banks and micro-finance institutions in developing a robust risk management system, which in turn would reduce the risk of multiple borrowings and loan defaults. As such, the MF-CIB would open access to credit for millions of potential poor borrowers and reduce the credit risk cost of the lenders, besides lowering the loan price for borrowers. At present, even the creditworthy borrowers of micro-finance institutions face difficulties in accessing larger loans due to non-availability of their history of past loans and timely repayments to a micro-finance institution. The MF-CIB could facilitate the "graduation" of such livelihood-based workers into small entrepreneurs. SBP, according to the Governor, had played a sterling role in the development of micro-finance sector as an alternative to conventional banking to serve the lower end of the market. Financial inclusion, which was a core component of SBP's financial sector development strategy, envisages transferring the financial market into an equitable system with efficient market-based financial services to the otherwise excluded - poor and marginalised - population, including women and young people. Pakistan had one of the lowest financial penetration levels in the world, with 56 percent adult population totally excluded, and another 32 percent informally served. We totally agree with the basic idea of State Bank establishing the MF-CIB but are also aware of its limitations. As in the case of existing credit bureau in the SBP, the new bureau would also certainly serve a very useful purpose by identifying the habitual loan defaulters in the micro-finance sector. The raising of red flag in these cases would not only help the micro-finance institutions in refusing loans to applicants with a dubious history but would also oblige these institutions to open access to potential creditworthy borrowers who could play a really useful role in reviving economic activities in the country. The opening of MF-CIB, could also have an indirect impact on alleviation of poverty and creation of more employment opportunities. Since the ratio of loan default in micro-finance in Pakistan is usually higher than in conventional lending, the establishment of such a facility in the SBP was of course long overdue. However, while commending the usefulness of MF-CIB, it needs to be kept in view that State Bank, as a matter of policy, should not be so much concerned about equitable distribution of credit or helping the poorer or marginalised sections of society. While assistance to the poor is a noble idea, it is the proper management of fiscal policy which should carry the burden of a welfare regime and ensuing equity, bank credit must be facilitated to flow to business activities which yield the highest returns to ensure its use in an optimal fashion. Also, the situation, at present, demands that the State Bank must continue to concentrate on ensuring price stability and persuading the government to borrow less from the banking system in order to spare more resources for the private sector credit expansion including for the micro-finance sector. Nobody can refute the importance of micro-finance in the country's economy and the need to remove impediments to its free flow but the nation will be served better if the State Bank continues to accord priority to its primary responsibility of reducing inflationary pressures on the economy and checking sub-optimal use of bank credit.
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