KARACHI, Dec 19: The State Bank of Pakistan on Friday launched initiatives for development of microfinance, with 50 million pounds of UK government and $20 million of Asian Development Fund.

SBP Governor Dr Shamshad Akhtar launched the initiatives at an event attended by all stakeholders, including donors, presidents and CEOs of commercial and microfinance banks, and representatives of the Pakistan Microfinance Network and Pakistan Bankers Association.

These measures are expected to ease liquidity constraints of microfinance providers in view of tight liquidity conditions and sudden spike in inflation which has severely affected the poor and marginalised segments of society.

The SBP has launched three facilities to support the microfinance sector: microfinance credit guarantee facility; institutional strengthening fund; and improving access to finance services fund.

These initiatives are part of the 50 million pounds Financial Inclusion Programme supported by the UK Department for International Development (DFID) and an endowment fund worth $20 million under the ADB’s Improving Access to Financial Services Programme.

The microfinance credit guarantee facility is expected to increase flow of credit to microfinance sector, and is aimed at giving incentives to banks and DFIs to channelise funds to microfinance banks and microfinance institutions (MFBs and MFIs) for lending to low-income segments of population.

The facility will provide credit guarantees of up to 40 per cent of the funding provided by banks and development finance institutions and aims to develop market and graduate poor borrowers to mainstream financial service providers. Banks and DFIs will lend to MFBs at the SBP policy discount rate plus 200 bps.

The funds channelized under facility to MFBs and MFIs will be deductable from demand and time liabilities of banks and DFIs for statutory liquidity requirement and cash reserve requirement calculation.

The facility will be established at the State Bank with the help of UK Government’s Financial Inclusion Programme grant funds equivalent to 10 million pounds to be used as guarantee fund.

The State Bank has issued necessary guidelines for making the facility operational which were finalised after due consultation with stakeholders.

The microfinance credit guarantee facility is expected to help raise local currency funds for eligible MFIs and MFBs.

The loans portfolio under the guarantee scheme will be administered by banks. The facility will also help build links between micro borrowers and formal financial institutions.

The facility will provide partial guarantees to minimise the perceived risk premium by covering part of the losses incurred on funds made available to MFBs and MFIs with the advantage of leveraging the guarantee fund a number of times while keeping the incentive for banks and DFIs to collect the loan.

The lending of microfinance credit guarantee facility would help these institutions play their role in the growth of micro- credit more effectively.

The Institutional Strengthening Fund is designed to build capacity of the microfinance sector, and is expected to enhance potential for growth and create a depth in outreach by improving human resource quality, service delivery and increasing service availability to potential microfinance clients.

The fund is established at the State Bank under the UK Government’s Financial Inclusion Programme that involves funds equivalent to pound sterling 10 million for institutional strengthening. The fund will provide grants for capacity building to generate on-lending resources through commercial sources, equity investments or deposit mobilization strategy through improvement in management, governance, internal controls and functions.

The fund will also provide grants for employing cost reduction mechanisms for increasing outreach in rural and remote areas through product innovation, development or use of technology.

In addition, the fund will provide grants for business development services to MFI clients or improving quality of services; and developing capacity for transformation of MFIs into licenced microfinance banks.

The fund will primarily focus on institutions that are already regulated, or are in the process of seeking a license or have solid plans for restructuring in the near future. SBP regulatory oversight will ensure transparency and good governance practices, which will ultimately lead to greater investment in the microfinance industry.

Moreover, ISF is capped at US$1 million per year per grantee and is subject to at least 25pc matching grant from the grantee. Grants may be made on an annual basis and institutions that qualify for funding in a year may also qualify for funding in another year subject to good performance and submission of another successful proposal through the approved application procedure.

The Improving Access to Financial Services is also designed to enhance capacity of the microfinance sector and promote financial literacy.

The fund has been established at the State Bank with help of an endowment of $20 million under the ADB-supported “Improving Access to Financial Services Programme – IAFSP.”

The fund will provide benefits the rural and urban communities, in particular the poor and women.