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Technical Assistance Consultants Final Report

This consultants report does not necessarily reflect the views of ADB or the Government concerned, andADB and the Government cannot be held liable for its contents. (For project preparatory technicalassistance: All the views expressed herein may not be incorporated into the proposed projects design.

Project Number: TA 4894November 2009

Islamic Republic of Pakistan: Improving Access toFinancial Services Credit Information Bureau(Financed by the Asian Development Bank)

Prepared by FINCON Services Inc.

For Ministry of Finance & State Bank of Pakistan

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Improving Access to Financial Services in Pakistan

Final Report

Credit Information Bureau

(VOLUME V)

November 2009

STATE BANK OF PAKISTAN

MINISTRY OF FINANCE

TA No. 4894-ADB

Submitted by:

Fincon Services Inc.

Canada

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Table of Contents

ACKNOWLEDGEMENTS AND ABBREVIATIONS

EXECUTIVE SUMMARY 1

SECTION I: BACKGROUND. 4

A. Introduction . 4

A.1. Rationale for the Project. 5

A.2. Historical Context. 6

B. The Benefits of a CIB covering Microfinance 11

SECTION II: THE CURRENT ENVIRONMENT. 14A. The eCIB at State Bank of Pakistan.. 14

A.1. the eCIB Data Base and Report Framework 15

B. Private Sector Credit Bureaus 20

C. Demand for Micro Credits 23

D. Growing Competition in the Sector 25

E. Supportive Factors for an MFCIB . 28

E.1. Consensus Regarding the Need for an MFCIB . 28

E.2. Conditions Favoring a CIB for MFIs.. 35

F. Obstacles to an MFCIB 39

F.1. The Legal Stumbling Block.. 39F.2. the Social Imperative 42

F.3. MFI Reluctance.. 45

F.4. the Question of Timing 46

F.5. the Quality of Credit information . 47

F.6. Other Possible Risks 49

SECTION III: THE LEGAL AND REGULATORY ENVIRONMENT IN PAKISTAN . 52

A. Government Policy. 52

B. Recommended Revisions to the Legal and Regulatory Framework. 53

C. The Draft Credit Information Act. 55

SECTION IV: PROSPECTS FOR A CIB FOR MICROFINANCE. 62

A. Whither the Microfinance Market?. 62

A.1. Trends in the MF Market. 63

B. Donors and Funding 64

C. Deposits and Funding. 66

D. The Role of Islamic Finance and M-Banking . 69

E. The Role of SBP in an MFCIB.. 74

E.1. the Majority View 74E.2. the Minority View 75

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E.3. Best Practice 76

F. The Options for a New MFCIB 79

G. Financial Projections.. 82

H. The Lahore Pilot Project 86

SECTION V: CONCLUSIONS, RECOMMENDATIONS AND NEXT STEPS 91

A. Conclusions.. 91

B. Recommendations.. 93

C. Next Steps 98

ANNEX A: Persons Interviewed 102ANNEX B: Basic Principles of a CIB: 104ANNEX C: Bibliography 105ANNEX D: Profit and Loss Scenarios for MFCIB

BOXES, TABLES, CHARTS AND GRAPHS

Table 1: The Microfinance Sector in Pakistan.. 9

Table 2: Microfinance Providers. 11

Table 3: The Beneficial Effects of Introducing an MFCIB in Pakistan 13

Table 4: Active Borrowers in the eCIB Data Base. 16

Table 5: Inquiries to the eCIB Regarding Consumer and Corporate Borrowers 17

Table 6: Stakeholder Matrix 30

Table 7: Unsolicited Statements in Support of an MFCIB. 36

Table 8: Is There a Need for an MFCIB? .. 38

Table 9: Obstacles to a Credit Information Bureau. 40

Table 10: Financial Self-Sufficiency.. 43

Table 11: Comments on the Draft Credit Bureaus Act 2007.. 56

Table 12: Volume of Savings by PMN Members 65

Table 13: Funding Structure of MFBs 67

Table 14: SWOT Analysis for MFCIB 80

Table 15: Options for a Microfinance Credit Information Bureau. 81

Table 16: Should Membership in an MFCIB be voluntary or Mandatory? 86

Table 17: Sample of MFIs Participating in PMNs Pilot Project. 88

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ACKNOWLEDGEMENTS AND ABBREVIATIONS

The consultant would like to express his appreciation for the administrative andresearch support he received from the Team Leader of the project, Mr. Tahir Ali Shah,and his staff who provided both a professional and friendly atmosphere. The Ministry ofFinance provided office space, while State Bank of Pakistan provided much usefulcontext, documentation, and data. At SBP I wish to thank Qasim Nawaz, Zulfikar A.Khokhar, and Syed Ali Jafar Abidi for their cooperation.

Syed Mohsin Ahmed and Moazzam Iqbal at Pakistan Microfinance Network were mosthelpful in providing data and advice on the growing microfinance sector. Ammar Valikaof Sidat Hyder Morshed provided a wealth of contacts and astute criticism of earlierdrafts. All those interviewed, from senior government officials to microfinance lenders,

were candid and helpful in expressing views and preferences.

ADB Asian Development BankCBR Central Board of RevenueCGAP Consultative Group to Assist the PoorDAMEN Development Action for Mobilization and EmancipationDFID U.K. Department for International DevelopmenteCIB Electronic Credit Information Bureau (within SBP)FMFB The First Microfinance Bank Ltd.FSSP Financial Sector Strengthening ProgramGIS Geographic information systemGOP Government of PakistanIFC International Finance CorporationIFI Islamic Financial InstitutionMFB Microfinance bankMFCIB Microfinance credit information bureauMFI Microfinance institutionMFP Microfinance providerMIS Management information systemMOF Ministry of FinanceNADRA National Database and Registration Authority

NGO Non-government organizationNIC National identity cardNRSP National Rural Support ProgramPAR Portfolio-at-riskPCR Public credit registryPKR Pakistani rupeePMN Pakistan Microfinance NetworkPPAF Pakistan Poverty Alleviation FundPRSP Punjab Rural Support ProgramRSP Rural support programSBP State Bank of Pakistan

SECP Securities and Exchange Commission of PakistanUSAID U.S. Agency for International Development

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ADB TA 4894-PAK: Improving Access to Financial Services

Final Report Page 1 of 107

EXECUTIVE SUMMARY

1. Five CIBs already exist in Pakistan, four private and one public, all with varying

market coverage and degrees of success. The largest and oldest is eCIB housedin State Bank of Pakistan. It requires all regulated financial institutions to reportdata on all their loans, both disbursements and payments. Interviews with usersof the eCIB expressed differing degrees of satisfaction with the process and withthe eCIB reports.

2. With the growth on both the demand and supply side (more borrowers and morefunds to lend) and with the new microfinance lending institutions in place (therecently established microfinance banks), there remains only one important pieceof the micro-financial infrastructure missinga credit information bureau coveringthe microfinance sector.

3. The benefits of extending coverage to the MF sector in Pakistan are extensive.An MFCIB will Extend outreach of credit for low income families Mitigate poverty by expanding access to finance to women and to the

entrepreneurial base of the rural areas Strengthen the credit culture on both the lending and borrowing sides Promote competition among MFPs, which will help reduce lending rates and

extend the maturities of loans Identify debtors and delinquents more conclusively

Provide a black list of bad borrowers Assess the real level of indebtedness of clients, thereby avoiding over-lending Result in lower default and delinquency rates Reduce the instances of over-borrowing from multiple lenders Reduce instances of fraud

4. The conditions for creating an MFCIB are present, including a rapidly growingdemand for small credits, strong competition among MF providers, facilitativegovernment policies, and an awareness among all stakeholders (public andprivate) of the benefits of credit bureaus. An MFCIB will be a necessaryingredient in the Government of Pakistans program to extend access to financialservices throughout the country so that poverty levels can be reduced.

5. There are many factors supporting the creation of an MFCIB. They include: The microfinance sector has huge upside potential (25-30 million borrowers)

which creditors are increasingly eager to tap. Near unanimity of opinion among stakeholders that a new CIB spanning the

MF sector is greatly needed and should be created as soon as possible The Pakistan Microfinance Network whose members account for 96% of

microfinance lending is squarely supportive of a CIB. There is unqualified support at the highest government levels for extending

financial services throughout the country via MFIs.

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The regulatory and legal regimes, which are usually serious roadblocks to aCIB, are generally favorable in Pakistan.

6. At the same time, there are a number of obstacles facing the creation of such a

commercially sustainable entity. The principal ones include Gaps and ambiguities in the legal and regulatory environment The financial weakness and non-commercial, poverty-alleviation approach by

some significant micro-credit providers Inaccurate and incomplete data on MF borrowers The lack of skilled staff at microfinance institutions and varying states of MIS

mismatch among MFPs Insufficient domestic savings to finance micro-credits, and the prospect that

donor funding by MFPs may dwindle. MF banks need to mobilize depositsurgently or the market could falter due to a shortage of supply of funds.

7. Several of the legal uncertainties facing an MFCIB will be alleviated with thepassage of the Draft Credit Bureaus Act, 2007, which is currently circulatingamong ministries. The consultant reviewed the Draft Act and found that itaddressed many key principles and conventions needed in such a law based oninternational standards. However, certain omissions and contradictions need tobe corrected. It is recommended that the Draft be amended as indicated andpassed by the new National Assembly as soon as possible.

8. Estimates of the potential size and future growth rate of demand for microfinancein Pakistan widely vary, but active participants are all quite optimistic about the

trajectory. A realistic estimate of the outstanding MF portfolio nationwide at theend of 2007 would be 1.45 million active borrowers with three million anticipatedby 2010. Questions remain, however, regarding the source of financing for thisgrowth, since domestic savings are insufficient and donor funding is uncertain.

9. Mobile banking (or branchless banking) is likely to grow rapidly in Pakistan andshould enhance the need for and value of an MFCIB, since it will permit thedeepening and broadening of the MFCIB data base. The growth of Islamicfinancial products will also help bring the unbanked into the formal system.

10. The role of the State Bank of Pakistan in creating, enabling, regulating and

running an MFCIB was a subject of wide discussion. A minority of views favoredSBPs active participation because the eCIBs data are more voluminous and theinfrastructure is already in place. It would be a natural extension of currentactivities and would save time as opposed to creating a new CIB.

11. However, a large majority of those interviewed held that SBP should facilitate thecreation of an MFCIB, but not own it or manage it. This view is in line withinternational best practice. When the state plays a major role in directingeconomic activity, the results are most often a skewed incentive structure and thediversion of resources. Nonetheless, it would be appropriate for SBP to take thelead in policy decisions on CIBs, to license them, to provide supervisory

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oversight, to make regulations on data collection and dissemination, and toensure consumer privacy and protection.

12. In estimating future demand for micro credits, conservative assumptions were

used. The revenues and costs forecast for an MFCIB are based on threedifferent levels of inquiry fees. In the two cases where fees were set belowmarket levels, the MFCIB was either not profitable indefinitely or not profitable forits first four years. When the fee was set at commercial levels (currently PKR60), the MFCIB became commercially sustainable in the third year even withlarge initial capital costs. If modest donor funds or soft loans are factored in tocover these costs, the MFCIB reaches breakeven quickly and gains credibilityand legitimacy.

13. The Lahore pilot project, currently in the planning stage, is an important first steptoward an MFCIB. The obstacles to creating and operating an MFCIB are not

enormous; it is a matter of consensus, marketing and persistence by participants.

14. The conclusion of this study is that given the positive market conditions listedabove, an MFCIB is quite feasible in Pakistan, assuming stakeholderperseverance, clarification of ambiguities in current regulations and laws, initialdonor support, technical training of stakeholder staff, and an upgrading of MFPsIT and MIS.

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SECTION I. BACKGROUND

A. IntroductionThe microfinance sector in Pakistan has grown rapidly in recent years, from just60,000 active borrowers in 1999 to and estimated 1.5 million in the end of 2007.Pakistan Microfinance Network (PMN), a non-profit association of nineteenmicrofinance providers (MFPs) that covers 95% of the MF market, estimates thatoutreach in the sector will grow to three million by 2010 with an upside potential inthe long run of 15-20 million.

The growth has been facilitated by several factors, mainly a government that isactively pursuing the expansion of financial services into untapped urban and ruralareas through appropriate regulatory and institutional means, and the proliferation ofmicrofinance providers able and willing to reach into the poorer areas with fundsprovided by international donors.1

With the growth on both the demand and supply side (more borrowers and morefunds to lend) and with the new MF lending institutions in place (the recentlyestablished microfinance banks), there remains only one important piece of thefinancial infrastructure missinga credit information bureau (CIB) covering themicrofinance sector. A CIB acts as an intermediary between lenders and borrowersand brings many benefits to both creditor and debtor, helping to create a credit-conscious culture while reducing the number of delinquencies on loans and

facilitating healthier bank balance sheets.

An international credit information system specialist from Fincon Services Inc. viaBank world Inc. was tasked with the following responsibilities.

1. To assess the potential for the establishment of a credit information bureau for alltypes of institutions, including Microfinance Banks, Rural Support Programs, andother Non-Government Organizations to support improved access to financialservices and lower cost services through improved information systems, reportingand transparency;

2. To conduct a feasibility study in cooperation with the Pakistan Microfinance

Network for establishment of credit bureau; and3. To present the results of the feasibility study and recommendations in a

workshop for relevant stakeholders.

From September 2007 through April 2008, the consultant spent four months inPakistan, primarily in Islamabad but also in Karachi and Lahore, where he met andinterviewed 69 people at 35 different government and private institutions, often more

1For more detail on the rapid growth of the MF sector in Pakistan, see Pakistan Microfinance Network

and Shore Bank International Ltd., Microfinance Performance in Pakistan, 1999-2005, Islamabad,

2006.

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than once, to ascertain the prospects for a credit information bureau that would servethe microfinance sector. Aside from multiple meetings with State Bank and PMN,the consultant visited, among others, three donors, five NGOs, three RSPs, fourcommercial banks, six microfinance banks, and four credit information bureaus.

Although CIBs exist for the regulated banking system covering both consumers andcorporations, there is no CIB that reaches into the poorer urban and rural areas tocapture borrower debt and repayment data. Such a microfinance-dedicated CIBwould be a vital ingredient in the Government of Pakistans program to extendaccess to financial services throughout the country so that poverty levels can bereduced.

A.1 Rationale for the ProjectThe Asian Development Bank, the multilateral lending institution that is funding thisproject, offered a clear rationale in its Report and Recommendation of the President

to the Board of Directors regarding the loans and TA to Pakistan (excerpts here)2:

24. Lack of reliable business information and credit history has been a majorimpediment to the growth of financing for the poor and for micro-enterprises....SBP and the Pakistan Microfinance Network recognize the needfor a credit information bureau for all types of institutions (regulated andunregulated), including microfinance banks, rural support programs (RSPs),and other NGOs....Broader credit information coverage is especially importantin rural areas where RSPs and NGOs are key providers of financialservices....This will be increasingly important as commercial lenders expandtheir targeting of the microfinance market. An expanded credit reporting

system can also promote competition among lenders, and provide goodcustomers with alternative sources of finance.

....Based upon a PMN competition survey conducted in Lahore in 2006, PMNofficials state that the demand is high for such credit information service in theexpanding and competitive Lahore market. A feasibility study to determine thepotential design, operations, and initial capital required is needed to pilot anexpanded CIB covering regulated and unregulated institutions.

The ADB goes on to applaud Pakistans achieving economic growth rates averagingover 7.5% a year for the three years to 2006. However, more needs to be done toalleviate poverty3.

Twenty-four percent of the population, or 36 million people, still live below thepoverty line. Inclusiveness and/or the sustainability of this growth requiremore reforms backed by specific actions targeting those left behind....Accessto credit and other financial services can be made much easier, moretransparent, cost effective, and efficient. This is the essence of the proposedprogram.

2Asian Development Bank, Proposed Loans and Technical Assistance Grants, Islamic Republic of

Pakistan: Improving Access to Financial Services (Phase 1) Program, Project No. 39492, November

2006.3 Ibid., pp. i-ii.

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Before proceeding, a clarification is in order. The task for this CIB project wasworded in two slightly different versions, which produced some ambiguity.

Version 1: To determine the feasibility of a private CIB covering both regulated and

unregulated lenders, including microfinance institutions, non-governmentorganizations, microfinance banks, and rural support programs.

This language implies the need to determine the potential for creating anindependent private sector-owned CIB that would coverallcreditors, including thosenot currently regulated, such as RSPs and other NGOs, which means assessing thefeasibility of a new and broader CIB that could replace existing CIBs or merge withthem. (emphasis added)

Version 2: To expand Credit Information Bureau (CIB) coverage to include themicrofinance sector and develop a Credit Information Bureau for all types of financial

service providers. (emphasis added.)

The language in this version implies either the widening of current eCIB coverage atState Bank of Pakistan into the MF sector, or creating a new and different CIB for alltypes of creditors, and it could be either publicly or privately owned.

One infers from the differing versions that we should look at several options:

1. Expanding the existing eCIB at SBP to cover the microfinance sector2. A merger of existing private credit bureaus, such as Data Check or NEWS-

VIS, or their individual expansion into the MF sector3. Creating a new private CIB just for the MF sector, one supported by the PMN

and its members including existing microfinance banks (MFBs).

Following extensive onsite research and interviews between September 2007 andFebruary 2008, these three options plus two others emerged as possible avenues ofapproach.

A.2 Historical ContextThe subject of a credit information bureau has been in the public forum in Pakistanfor at least four years. Microfinance institutions, the State Bank of Pakistan, as well

as regulated and unregulated financial institutions and private associations, includingexisting credit bureaus and the Pakistan Microfinance Network (PMN), have debatedthe need for another CIB and even commissioned studies from internationalconsultants and donors. Government policy statements and presentations about thefinancial sector invariably include a reaffirmation of the need to create a creditscreening institution that will facilitate the broadening of finance to the rural andurban poor.

At least two prior studies on the subject were conducted in recent years. The firstwas written by Bolivian consultants InfoCred and Fin Rural in late 2004. The briefreport was long on the macroeconomic picture in Pakistan and short on analysis of

the feasibility of a new CIB. Its coverage of the legal environment in Pakistan,

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supply and demand factors, initial and operational costs, and data availability wasincomplete.

The second report was funded by the World Bank Group at about the same time and

written by a respected Pakistani consulting firm, Sidat Hyder Morshed Associates(Pvt.) Ltd for the State Bank. This study covered such topics as the existinginformation infrastructure at eCIB, the methodology for developing software for CIBs,and CIBs in other countries, such as those in the UK, Singapore, Malaysia and NewZealand.

Before, during and after these studies, the Government of Pakistan (GOP) wasmoving rapidly along a number of MF-related policy fronts. Among these stepstaken to further development of the microfinance sector and to provide the rightfacilitative environment for initiatives in this area were the following4:

1. The launch of the Microfinance Sector Development Program implemented bythe GOP through the Ministry of Finance with assistance from the AsianDevelopment Bank

2. The establishment by Presidential Ordinance in 2000 of the countrys firstmicrofinance bank (MFB), Khushhali Bank (KB)

3. The establishment in 1999 by the GOP of an apex institutionthe PakistanPoverty Alleviation Fund (PPAF)to ensure availability of funds on acontinuous basis to NGOs

4. The enactment of an exclusive regulatory framework for microfinancetheMicrofinance Institutions Ordinance, 2001.

5. The creation of First Microfinance Bank from the assets of the Agha KhanRural Support Program

6. The recognition by the GOP, at the prompting of PMN, that microfinance canbe a mechanism to deepen financial sector penetration rather than solely atool aimed at poverty alleviation

7. The Government has made microfinance a key theme under its Medium-TermDevelopment Framework (MTDF) 2005 2010

Several private sector CIBs have entered the market for consumer loans, and theState Bank has its own eCIB covering the regulated financial sector. The eCIBsreporting, operational and IT systems have been revamped in recent years and

significantly upgraded in the light of best international practices. The scope andadministration of the eCIB database has been further enhanced by upgradingcommunication infrastructure, hardware and software, thereby improving the overalloperational efficiency of eCIB.

However, despite official exhortations, studies and new MF policies, there has beenlittle or no movement on the MFCIB front. The primary reason appears that no entity,government or private, was quite convinced the market conditions were right and noone wanted to expend time and money prematurely. Now with demand for micro-

4

Syed Mohsin Ahmed and Mehr Shah, Amendments to the Microfinance Institutions Ordinance,2001: Implications for the Sector, Essays on Regulation and Supervision, October 2007, pp. 3-5.

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credits rising rapidly and microfinance providers (MFPs) competing vigorously forclients, the timing appears right.

This present feasibility study for microfinance CIB was commissioned to be the last

of its kind. It assesses the MF market, offers alternative approaches forestablishment, and provides a road map if such an entity appears feasible andsustainable over time. There are only 5 million borrowers in all of Pakistan out of160 million people, so the country is under-banked and underserved. About 70% ofthe Pakistani economy is outside the formal banking system, so there is a vastpotential for broadening access to finance, and an MFCIB is an important meanstoward that end.

Pakistan is lagging many other countries in getting financial access to the poor. Onemeasure is the MFI participation rate, which measures how much of the populationMFIs reach as a percentage of the total population. In Pakistan today the rate is less

than one percent, while in Bangladesh the rate was 13.1% in 20035. Nineteen othercountries, including Indonesia, Sri Lanka and Nepal, had participation rates higher in2003 than Pakistans rate today. Healthier MFI balance sheets plus greater use ofan MFCIB plus the growth of m-banking will all help to raise Pakistans participationrate.

Table 1 shows the growth and status of the MF sector in Pakistan. The firstsignificant statistic that emerges is the rapid growth rate of the number of activeborrowers in recent years. New entrants help explain the current high level of interestamong providers, although admittedly the numbers start from a low base.

Still, the sector is experiencing an expansion that most participants forecast willcontinue. The validity of that assumption really lies at the base of this study. Acontinued strong demand for credits from the rural and urban poor will set in motioncompetitive pressures among MFPs and policy pressures at SBP to facilitate theprocess so that the goal of poverty alleviation has a better chance to succeed. Toput this in context, current poverty reduction goals have not been achieved despiteeconomic growth exceeding 7% per annum on average this century.

According to PMN, the microfinance industrys network coordinator, capacity builderand spokesman, there are about 1.5 million active borrowers in the MF sector today

with at least three million forecasts for the end of 2010. Beyond that, there is apotential for 25-30 million, according to the State Bank.

MFPs interviewed were in agreement that the rural and urban poor have nopropensity to default on their loan payments. MF clients do not intentionally cheat orevidence an unwillingness to pay. Poor people are simple and honest, they said,and want to repay their loans, even when there are illnesses or deaths in the family.Moreover, they dont default because they are afraid of the police and concernedabout their reputations. They dont want to shame their ancestors and their good

5

Patrick Honohan,Financial Sector Policy and the Poor, World Bank Working Paper No. 43,Washington, DC 2004, page 4.

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name. More positively, the poor repay because they see the loan as a window ofopportunity they do not want to lose.

MFP officials say the basis for bad loans is circumstantial, not intentional. They cite

the following types of events that cause missed payments: bad weather when travel and communication are not possible an indifferent or unknowledgeable client illnesses, funerals, weddings and eid holidays and other personal reasons misbehavior on the part of MFP staff loan made to a woman but used by her husband fraud where the reason for the loan is misstated when an activist or group leader abuses or cheats the borrower

If the above is true, then there seems little need for a credit bureau for microfinance,

especially as the loan sizes are small (averaging perhaps $200) and credit risk isminimal. Yet the data show there are bad loans in the sector. The MFPs have write-offs as high as three percent of their gross loan portfolios. Table 1 shows that theirportfolio at risk >30 days is around 2.5%?6

Table 1:

The Microfinance Sector in Pakistan*

2003 2004 2005 2006 2007e 2008f

No. Active Borrowers** 332,548 451,324 612,744 835,460 1,450,000 2,138,750

Growth in ActiveBorrowers (%)

224 35 36 36 74 48

Total Assets of MF sector

(USD millions)

140.6 160.8 223.6 288.6 366.5 465.5

Gross Loan Portfolio (USD

millions)

47.1 66.5 95.1 176.8 246.0 372.0

Write-offs / GLP (%) 3.1 3.2 3.0 3.1 3.2 3.2

PAR (>30 days) / GLP (%) 13.0 9.3 3.3 2.3 2.4 2.5

PAR (>90 days) / GLP (%) 8.8 7.6 2.0 1.3 1.3 1.4

Pakistans GDP (USDbillions)

83.5 98.1 109.6 127 143.8 151.0

Total MF GLP / GDP (%) 0.056 0.068 0.087 0.14 0.17 0.25

Sources: PMN for historical data, The Performance Indicator Report based on auditedaccounts of MFPs. Fincon for most of 2007 and 2008 data.

6Two reasons seem to account for this seeming anomaly. One is that the data collected by non-

regulated MFIs are not as accurate and unambiguous as the data in the formal banking sector. The

other is that the ratios just quoted are from the PMN data base that comprises only their 20 members,although these members do comprise 96% of microfinance lending.

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* Data refer to the portfolios of the 20 MFPs that are members of PMN (including NGOs,RSPs and MFBs). Since half these MFPs use the calendar year as their fiscal year andthe other half use June, the aggregated data are not precise.

**Active borrowers are defined as the number ofpeople with loans outstanding at themoment; however, some MFPs use the term active borrower to mean the number ofloans outstanding which may be more than one per person. State Banks classification isthat if a borrower has taken credit lines from more than one financial institution, it countsas one borrower. As the new NIC becomes more widespread and MFPs agree oncommon definitions, this likely double counting should diminish.

Write-offs = Loans not repaid at all (practice varies as to when the loss is actuallybooked). Some MFPs call these bad loans, again an instance of diverse terminology inuse.

GDP= Gross domestic product (the total market value of all final goods and services

produced in Pakistan within the calendar year).PAR= Portfolio at risk = value of loans outstanding at a point in time, the same as non-performing loans or loans due past 30 days. Loans that are up to 30 days late are notcommonly deemed non-performing.

_____________________________________________

Another interesting point to note in Table 1 is the skewed nature of the MFPs assetson their balance sheets. In normal circumstances, a lenders assets consist mostlyof loans (70-80%), but only Kashf Foundation is within this range (76%). For theother MFPs, loans range from only 33.5% of assets in 2003 to 67.1% in 2007. Thetrend is satisfactory, but one wonders why MFP management chose/chooses to

keep a large share of their assets in cash, government securities and deposits inother FIs. Is it political uncertainty, tax issues, or risk aversion?

The next table, Microfinance Providers, lists MFPs by category. Some are large andinfluential (NRSP, Kashf Foundation) and some are small (Sarhad RSP and TaraqeeFoundation). Some are regulated by SBP (all the MFBs) and some are not (all theNGOs and RSPs). The eleven MFPs that are highlighted are participating in thePMN-sponsored pilot project in Lahore. (See Section IV H.)

Table 2: Microfinance Providers (MFPs)

RSPs MFBs Multi-sectoral

NGOs

Commercial FIs Specialized MFIs

National RSP Khushhali Bank DAMEN Bank of Khyber Kashf Foundation

Punjab RSP First Micro Finance Bank Sungi

Development Fdn.

Orix Leasing Asasah

Sarhad RSP Rozgar Microfinance

Bank

Taraqee

Foundation

First Womens

Bank

Akhuwat

Thardeep Rural

Development

Program

Network Microfinance

Bank

SME Bank SAFWCO

Tameer Microfinance Orangi Pilot Project

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Bank

Pak-Oman MFB Community Support

Concern

B. The Benefits of a CIB Covering MicrofinanceExperience in many countries confirms conclusively that there are multiple benefitsto having CIB intermediate transactions in the financial sector. Pakistan would nothave five CIBs already if that were not true. Microfinance is the one sector not fullyor appropriately covered yet in Pakistan. The benefits of extending coverage to thissector are extensive. An MFCIB will:

1. Screen clients more effectively2. Identify debtors and delinquents more conclusively3. Provide a black list of bad borrowers4. Assess the real level of indebtedness of clients, thereby avoiding over-lending5. Lower default and delinquency rates6. Reduce the instances of over-borrowing from multiple lenders7. Reduce instances of fraud8. Strengthen the credit culture on both sides: teaching lenders how to assess

credit risk and rewarding good borrowers by reducing access to finance for badborrowers

9. Open up alternative sources of finance for good borrowers10. Clarify market patterns and needs, thereby permitting better MF products11. Promote competition among MFPs, which will help reduce lending rates and

extend the maturities of loans

12. Permit more efficient management of credit risk by lenders13. Extend outreach of credit for low income families14. Reduce verification costs15. Keep PAR close to zero16. Mitigate poverty by expanding access to finance to women and to the

entrepreneurial base of the rural areas17. Increase the share of private credit in GDP, which is comparatively low in

Pakistan

Introducing an MFCIB will not produce all these benefits in a short period of time, norwill it be a quick fix for the problems shown in Table 1, but over time an MFCIB will

help increase transparency, remove a degree of uncertainty among MFPs, andprovide the basis for improved assessment of credit risk. Table 3 illustrates thisimpact.

The key point to keep in mind is that when credit histories of borrowers remain secretand unshared among lenders, the result is that (a) lenders are not aware of a newclients past repayment record or his current debt outstanding, and (b) borrowerstake advantage of the gap in information and procure multiple loans from differentcreditors, which adds to their indebtedness and reduces their creditworthiness.Extending CIB coverage to the MF sector will curtail these risks and reduce thepractice whereby individuals take new loans to pay off old loans without lenders

knowing.

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If MFIs pooled their borrower data in an independent third-party information providerlike an MFCIB, the costs of assessing borrower creditworthiness will drop since timewill be saved in identifying good and bad borrowers. In a virtuous circle, riskpremiums can then drop and more business can be attracted. From a broader

perspective, an MFCIB will encourage competition among lenders, reduce the costof borrowing for good customers, enhance the compliance culture, and promotegreater economic activity among the vast majority of Pakistans population.

Table 3 looks at the benefits of an MFCIB from a different angle by asking thequestion, how will it ameliorate current conditions in Pakistan? In a marketeconomy, the effects are all positive.

Table 3: The Beneficial Effects of Introducing an MFCIB in Pakistan

Current Conditions in MF Sector Effect of Introducing an MFCIB

Moderately high level of delinquent loans Will promote honoring of obligations, penalize

defaulters, reduce number of bad loans,

increase profitability of MFPs and generate

more internal capital

Low outreach, large untapped market Will speed up financial services delivery and

reduce borrowers costs by reducing

middlemen, both of which will build public and

MFP confidence

Most MFPs have inadequate IT

infrastructure

Will encourage banks and MFIs to upgrade IT in

order to have access to MFCIBs data basePoor governance practices in the sector Will promote better credit culture and reduce

access to funding for the non-transparent

Inexperience of rural and urban poor with

regard to financial institutions

Will promote greater understanding, new loan

products and more public confidence

Lack of reliable and timely financial

information about borrowers; hence,

heavy reliance on group lending and

social pressure to repay

Will increase the amount of borrower data

available so that creditors can make more

informed decisions based on individual

repayment history.

Poor data quality at borrower level(errors, gaps) which is transmitted to MF

lenders

MFCIB data collation will uncover data gaps,misinformation and fraud

High borrowing rates plus presence of

wholesalers with high commissions

With more competition for good borrowers and

more information on all borrowers, rates should

decline

Few loan products to attract clients; lack

of term funding sources

With less credit risk to worry about and more

confidence in lending decisions, MFPs can

diversify product lines, e.g., credit cards,

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mortgages

Insufficient IT infrastructure Will encourage banks and MFIs to upgrade IT in

order to have access to the CIBs data base

MFP staff untrained in risk management

Better trained staff will discriminate more

carefully among potential debtor/clients and

price risk accordingly

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SECTION II. THE CURRENT ENVIRONMENT

A. The eCIB at State Bank of PakistanPakistan has one public sector credit bureau housed at the central bank and fourcredit bureaus in the private sector. They serve different markets under differentregulatory regimes and are at various stages of achieving profitability. They all claimto have a unique niche in the market and all appeared, when asked, to be willing totalk with any new CIB for microfinance to explore avenues of cooperation.

Pakistans first credit information bureau (CIB) was established at State Bank in1992. The key principle of reciprocity was adhered to, that is, only those members ofthe CIB who contribute data to the CIB are eligible to inquire about a particularborrower whose data reside in the CIB data base. The CIB captured data fromfinancial institutions above PKR 0.5 million on corporate borrowers, an amountconsistent with SBPs goal of monitoring large loans that could pose a threat to thebanking system.

Then in April 2003 SBP vastly improved the scope of its CIB by introducing eCIB,becoming the first CIB in the region to have an online facility for its member FIs,enabling them to upload customer data and download customer credit reports.

The next step was for eCIB to remove its PKR 0.5 million floor on the size of loans toreport and to require all financial institutions, whether regulated by SBP or SECP, to

supply information on all their loans. This step occurred In April 2006, greatlyenlarging eCIBs data base from 200,000 to 4.6 million borrowers. The eCIBsforecast is for their data base to encompass as many as ten million customers by2011. The eCIB has the capacity (via Oracle) to expand its data base, so officialssay technical issues with regard to gathering and storing the data are not a problem.

The SBPs stated purpose for removing the floor was because (a) the central bankwanted to enable the recognition of smaller layers of default, and (b) the bankingsystem had matured and more credit cards and consumer loans were being offeredin the market that SBP wanted to capture.

From an international perspective, it could be argued that the previous floor for loanreporting, PKR 500,000 or about USD 8,300, is comparable to the floors in manyother countries with public credit registries. The country examples shown belowhave a similar minimum loan size because such a floor (a) keeps data managementunder control, (b) contributes to the central banks goals of banking supervision andpreserving banking system stability, and (c) does not stretch the central banksnarrower mandate into the private sector.

Indonesia $7,326Madagascar $7,983Nigeria $8,830

Romania $6,664

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Spain $6,450Turkey $6,371

Moreover, as the World Banks credit bureau specialist Margaret Miller argued in her

path-breaking book7, there are several good reasons for establishing a minimumloan size cutoff in a public credit registry (PCR).

1. If banking supervision is the primary goal of the PCR, then information onsmall loans is not likely to be of significance.

2. By including all loans, or virtually all loans, the number of records in theregistry balloons.The greater amount of data complicates management of thePCR and analysis of the data.

3. Data on small loans are also more likely to include errors, reducing the overallquality of the information in the registry.

4. A minimum loan size for the PCR will provide a clear market niche where

private registries can develop.

These are compelling reasons and ones that have convinced several central banksto privatize their PCRs, e.g., Azerbaijan, Mongolia.

A.1. The eCIB Data Base and Report FrameworkAs Table 4 shows, the number of active borrowers (both consumers andcorporations) registered in the eCIB data base has been steadily increasing,although the combined data since May-June 2007 show a peaking and slowing ofgrowth. Regulated financial institutions pay PKR 135,000 to join the eCIB andthereafter 30 rupees per inquiry about a borrowers current credit status. This fee isthe lowest cost option in the market.

Each inquiry to eCIB normally triggers a credit report that shows if a borrowersoutstanding loans are 30, 60 or 90 days overdue. If that is the case, this is thenegative data the creditors are seeking in order to determine whether or not toextend further credits. If there are no entries in the columns for overdue loans, thenin the eCIBs view that constitutes positive datano defaults, no missed payments,and no NPLs in the record.

State Banks eCIB generates credit reports with fresh payment histories of borrowers

every month showing a running account of the most recent twelve months.Borrowers who defaulted more than twelve months earlier, whether they clearedtheir records or not, will show a clean credit history in subsequent reports that eCIBgenerate. If a borrowers name was on a black list for six straight months, it willthen disappear after twelve more months, rendering his credit report current butless than accurate. The record of how much a borrower was overdue in hisdelinquencies and how many times he paid late or not at all is not shown at eCIB

7Margaret J. Miller, ed., Credit Reporting Systems and the International Economy, The MIT Press,

Cambridge, Mass., 2003, page 40

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Table 4: Active Borrowers* in eCIB Data Base

DATA AS ON:CORPORATEBORROWERS

CONSUMERBORROWERS TOTAL

April 30, 2006 19,367 2,283,571 2,302,938

May 31, 2006 20,066 2,361,376 2,381,442

June 30, 2006 21,592 2,362,612 2,384,204

July 31, 2006 22,086 1,774,702 1,796,788

August 31, 2006 22,103 2,683,650 2,705,753

September 30, 2006 23,525 2,693,061 2,716,586

October 31, 2006 24,286 2,764,271 2,788,557

November 30, 2006 24,543 2,523,969 2,548,512

December 31, 2006 25,537 2,955,871 2,981,408

January 31, 2007 26,333 2,885,925 2,912,258

February 28, 2007 26,979 3,257,266 3,284,245March 31, 2007 27,730 3,417,044 3,444,774

April 30, 2007 28,636 3,459,194 3,487,830

May 31, 2007 29,028 3,490,198 3,519,226

June 30, 2007 29,485 3,580,224 3,609,709

July 31, 2007 29,775 3,622,116 3,651,891

August 31, 2007 30,412 3,647,075 3,677,487

September 30, 2007 30,931 3,615,055 3,645,986

October 31, 2007 31,409 3,634,242 3,665,651

November 30, 2007 31,547 3,657,824 3,689,371

December 31, 2007 32,770 3,659,534 3,692,304

January 31, 2008 32,450 3,536,004 3,568,454

February 29, 2008 32,540 3,585,045 3,617,585

Source: State Bank of Pakistan

* Active borrowers are those with loans currently outstanding. Hence, the table does notrepresent the growth of all borrowers past and present but the incremental growth of newand active borrowers as of the date shown. If a borrower has availed various facilitiesfrom more than one financial institution, eCIB has counted it as one borrower.

The size of the loans reported to eCIB is interesting in that about one-third of

consumer loans are below PKR 30,000 (c. USD 484), which is the ceiling for MFloans to a single individual. Thus, the eCIB is capturing some data on borrowerstaking out microfinance loans. Proponents of the eCIBs extending its mandate tocover the whole MF sector can point to this and say eCIB already has a headstart, so why invent something new that will take time to reach the level eCIB hasalready reached.

On the corporate side, the percentage of smaller loans is much lower (less than8%). The existence of these smaller corporate loans can mean either (a) eCIB iscapturing some information on small and medium enterprises, or (b) somecorporations are taking smaller loans as working capital.

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By gathering debtor payment information, the eCIB is supposed to provide adisincentive for borrowers to default on their loans. But eCIB output provides onlycurrent information on whether a borrower has been overdue for a certain period. Itdoes not indicate the number of times he or she has been overdue or how many

months (after one year) that these instances occurred. Lenders cannot get a fullcredit picture of a borrower, and this dilutes the potential of the eCIB as a deterrentand as a credit tool. As long as financial institutions do not receive a completepicture of a borrowers credit history, this asymmetry of information will permit loandefaulters to continue to receive loans as long as they have settled earlier loans.

Table 5 below shows the unsteady rise in the total number of inquiries fielded byeCIB each month from banks who are seeking a credit report on their customers.Inquiries appear to have peaked in July and August 2007 and flattened thereafter,perhaps because as bank NPLs began to rise, banks reduced their rate of new loandisbursements.

Table 5: Inquiries to the eCIBRegarding Consumer and Corporate Borrowers

CONSUMER CORPORATE

Month Reports Month Reports

JUN-06 32,635 JUN-06 9,158

JUL-06 34,631 JUL-06 8,182

AUG-06 38,166 AUG-06 8,862

SEP-06 50,896 SEP-06 8,578

OCT-06 46,821 OCT-06 7,185NOV-06 82,614 NOV-06 9,175

DEC-06 87,060 DEC-06 8,794

JAN-07 92,540 JAN-07 7,728

FEB-07 108,157 FEB-07 9,369

MAR-07 147,076 MAR-07 10,343

APR-07 162,227 APR-07 10,212

MAY-07 178,527 MAY-07 10,783

JUN-07 194,315 JUN-07 11,120

JUL-07 208,489 JUL-07 11,020

AUG-07 221,926 AUG-07 9,931

SEP-07 195,705 SEP-07 9,611OCT-07 165,481 OCT-07 9,369

NOV-07 250,796 NOV-07 10,393

DEC-07 168,729 DEC-07 8,229

JAN-08 239,562 JAN-08 12,198

FEB-08 178,357 FEB-08 10,237

MAR-08 211,825 MAR-08 11,356

TOTAL 3,096,535 211,833

Source: State Bank of Pakistan. Data collection began in June 2006.

Thus, there are three problems with the eCIB report framework:

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First, the history on each borrower extends only over the most recent twelve months,which does not provide an appropriately lengthy record of borrower behavior. TheeCIB is considering extending the history to two years and then three years, which

would still be shorter than the records kept at the private CIBs in Pakistan.

Second, if the credit report shows no data in the 30/60/90 day past-due columns,SBP states that this amounts to positive data on the borrower, i.e., a good paymentrecord. However, no data in these columns could mean several things that are notdistinguished in the report. The person in question could be

a) A new borrower with no credit history, orb) A good borrower with a long credit history and no defaults, orc) A borrower who defaulted more than one year earlier (since data are

deleted after one year).

These three possible interpretations represent altogether different borrowercircumstances and profiles, and they need to be differentiated for credit riskpurposes.

Third, the data available at eCIB are not always up to date. Operationally, it is quitecumbersome for member financial institutions to update real-time loan information.Members upload their loan information to eCIB on the 15th of each month. If aperson takes out one or more loans on the 16th of a month, this increase in hisliabilities will not show up for another month, permitting multiple loan gathering andusing one loan to pay off another, behavior that would be captured with more currentdata.

As mentioned above, all banks now must report all loans to the SBP. One prominentinternational donor suspects that many banks did not even fully report their loansover PKR 500,000 prior to the floors removal. The inference then is that there isprobably even less compliance on the new requirement to report all loans. One canconclude that either the number of loans is too overwhelming to meet the monthlyreporting date, or banks do not have the internal capacity and MIS to cope with therequirement.

Another factor affecting the quality of the eCIB data base is that because complianceis mandatory, banks conform but without understanding the reasons or the value ofstrict and accurate compliance. Banks obliged to send data to eCIB reportedly donot like the aggravation of the reporting routine so they are not motivated to send incorrect or current data. Some even use Excel or old manual spreadsheets.

The inevitable result is that eCIB receives incomplete or incorrect data. Whenrecognized, eCIB returns the data to the financial institution with the order to corrector improve it. This response adds to the FIs compliance burden but ideally correctserrors in the eCIBs data base. SBP has the right to fine banks for noncompliance,but one large bank commented that it is worth the cost to pay the fine rather than

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spend the time complying or correcting input. Controls and processing are not up tomodern standards among us lenders, stated one banker.

In addition, mid-level bank employees do not know how to analyze the eCIB credit

report they receive. They just pass it along to management to use as a negative intheir loan decision-making. Several CEOs of the regulated MFPs were not familiarwith the eCIB credit report itself.

Contributors to the eCIB data base and recipients of the eCIB credit report voiced anumber of concerns about the eCIB process. Listing them here is meant to illustratethe kinds of problems that even a mature CIB can have. The list is also meant to actas a guide for what a new MFCIB might face.

1) The problems with eCIB are that (a) repaid loans are not reflected in theircredit reports, (b) loan data are 5-6 weeks out of date, and (c) the reports do not

cover all of a persons liabilities.

2) Various family members borrow for other family members, so you dont knowtotal exposure. The concern here is over-extension of credit.

3) The eCIB does not have the expertise to sort incoming data well for errors.Technicians at eCIB are not sensitive to misspellings.

4) The eCIB takes data at face value as supplied by the FIs without question.This leads to errors and a low hit rate (percentage of time that an inquirymatches information held in the data base on the individual or company.)

5) The eCIB sometimes disburses incorrect or ambiguous data, which causesthe bank a problem in decision making. For example, one bank received twodifferent reports from the eCIB on the same day showing different outstanding forthe same person, and in another instance the same company generated threedifferent outputs under three different names.

6) The problems with eCIB are with connectivity and the fact that mistakes donot get rectified immediately. The latter may result in an incorrect assessment forthe potential borrower.

7) At times the eCIB server is down (once or twice a week for 3-4 hours), so thebank cannot access information on a timely as-needed basis.

8) It would be useful to know which banks have made loans to a customer andwhich loans from which banks he has defaulted on. The eCIB report shows loansat a certain number of banks and one default but not the names of the bankswhere this activity took place.

Finally, it is alleged by a small number of financial institutions that the eCIB isoperating in a commercial manner, which should not be the role of a central bank

(aside from income derived from foreign exchange investments). Critics say that a

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central banks mandate is to promote monetary stability and protect the health of thebanking system, not to generate income.

These allegations prompted several responses from SBP:

(i) We are only covering our costs and besides any surplus automatically gointo the general budgetary fund.

(ii) The expenditures of the eCIB division are much more than its income.(iii) We need the revenue to ensure the functioning of an effective credit

information bureau, which is integral to promoting financial discipline,prudent lending and better credit risk management by the financialinstitutions.

(iv) The eCIB usage charges are minimum in order to restrict financialinstitutions from undue use.

(v) We are considering privatizing the eCIB at some future point.

As the consultant was unable to examine eCIBs financials, the validity of theseallegations and responses could not be tested.

B. Private Sector Credit BureausThere are four CIBs operating in the private sector with varying degrees of expertiseand scope. None of them was willing or able to provide much detail on theiroperations or finances so the commentary below is only brief. Our assessment of e-CIB above is deeper and broader and more critical because (a) much moreinformation is publicly available and (b) there are many more users of eCIB outputcompared to the private bureaus.

Data Checkwas founded in 1996 and started CIB operations in 2001 when Citibankand ABN Amro agreed to send negative customer loan data to Data Check. Thecompany currently has reciprocity arrangements with more than twenty such retailfinancial institutions.

Data Check responds to fee-based inquiries with reports that they claim cover 96%of the consumer market in credit cards. Data Check charges about 60 rupees perinquiry, twice the rate of the eCIB, but it adds value with a faster turnaround time.Unlike other CIBs in Pakistan, Data Check does not rely on the standard ID number(the NIC) to verify identities but relies on its own proprietary algorithm.

The company has payment records on 1.5 million borrowers (mostly credit cardholders) and receives 150,000 inquiries a month from institutions in the regulatedfinancial sector. The breadth of its consumer data base is indicated by their hit rateof 80%, which means that eight out of ten times they do have data on an individualor company when it is requested by a contributing member of the CIB. This rate isostensibly better than eCIBs. The average size of an inquiry to Data Check is PKR300,000 (about $5,000).

Tariq Nasim Jan, the Managing Director, expects growth in the number of MFIs tobe very steep, which, if this is the case, presents an additional reason for a bureau

dedicated to covering the MF sector.

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The World Banks IFC is helping Data Check introduce credit scoring which shouldadd another dimension. The IFC is also encouraging Data Check to take a furthermove into positive information sharing.

NEWS-VIS Credit Information Services. This CIB is the sister company of JCR-VIS Credit Rating Company Ltd. which assigns credit ratings to all banks in Pakistan.NEWS-VIS CIS runs off a unique data base built in 1996, and its CIB function beganin 2004. The information it gathers is not monthly consumer or corporate loanperformance data from creditors but rather newspaper accounts of peoples financialproblems, such as, bankruptcies, court cases, delinquencies, fraud, and those beingsued derived from public information sources.

News-VIS may be considered a negative information bureau and not strictly a CIB,as it only collects negative information on companies and individuals available frompublic sources, information that might indicate poor character. They deem

themselves a private research company, a simple data collector/provider that is notregulated. The CIB is owned by a major newspaper agency in the country, giving itaccess to large public sources of information. The staff of News-VIS scans up to 20newspapers from all parts of the country each day for the names of companies andpeople who have a negative financial record of some sort.

Company revenue derives from fees charged to clients (banks and corporations)who inquire about a particular person or company. This practice gives News-VIS aunique niche, because they have data that other companies do not have and datathat go back to 1996. Their turnaround time for inquiring clients is 24 hours by email(not online). NEWS-VIS charges an annual fee (undisclosed) and PKR 100 perinquiry about a person or company, whether there is a hit on their database or not.They receive about 1,500 inquiries per day.

The information on companies in News-VISs database covers over a millionindividuals and companies. Like Data Check, they do not use the NIC but haveconfidence that their own software will correctly identify people through cross-checking means and strong search capabilities. The data management andsearching software were developed in-house by the company.

The number of institutions using News-VIS services has rapidly increased as

consumer financing has expanded in Pakistan and with it the number of defaults anddelinquencies. Clients include leasing companies and mudarabas, although thecredit card, auto finance, and mortgage departments of some commercial banks domake periodic requests for information. News-VIS offers online reporting to itsclients and permits users to search for individuals and firms from its public sourcesdatabase. Their reports supplement the credit reports that financial institutions andother CIBs produce.

NEWS-VIS is the first credit checking entity in Pakistan to receive information onrents not paid. The supplier of these default data is a former state-owned entitynow corporatized and named House Building Finance Corp (HBFC).

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Finally, JCR-VIS has expressed an interest in collaborating with an MFCIB, perhapsfirst on a trial basis, to determine if their database can easily absorb MFI information.They contend they have the software and technology to become a third-partywarehouse to integrate all information from MFIs. PMN for its part has expressed a

willingness to talk further.

Credit Chexis the newest private CIB in Pakistan. It is owned by the local JS Groupand DCD Capital in the United States. Credit Chex has a partnership with the largestconsumer credit information provider in the world, Experian. Experian is a globalleader with $3 billion in annual revenues and credit bureau operations in 40 countrieswith joint ventures in another 20 countries to build and run credit bureaus.

Credit Chexs intention is to be a full-fledged CIB covering all of Pakistan for allfinancial and non-financial institutions whether regulated or not. They want to offermore information to lenders than is currently available, including scoring, debt

management and collections, and fraud detection. In addition to that, they havesubmitted proposals to Pakistani banks to help them with their Basel-II compliance.

Credit Chex intends to bring utilities, retail and telecom into their fold, creating amassive data base of borrower data that covers the MF consumer segment as well.In the meantime, they are offering advice on data management and runningseminars to educate the stakeholders. They call themselves a total riskmanagement solutions provider for the consumer economy.

In their view, the output offered by the eCIB at State Bank is limited, and it will takeyears to bring it up to standards in technology and data management. Moreover, asa state-run entity, eCIB will lag in trying to react to the changing needs of the creditmarkets.

Credit Chex believes there should not be a separate MFCIB which segments themarket. Instead there should be a single robust consumer credit bureau. Then inFebruary the company announced that PlaNet Finance, an International NGOdedicated to the development of microfinance around the world, signed up with theirpartner Experian for the delivery of CIB software for microfinance institutions. Thus,Credit Chex is positioning itself to enter that market as well.

Until the MF sector matures in its utilization of a credit bureau products and services,PMN should take the lead and act as an interim MFCIB. Credit Chex has offered towork with PMN in this role and to provide revenue in return for data sharing.

International Credit Information Ltd (ICIL). While this company is perceivedlocally as a credit information bureau, it does not really function like one. Thecompany is more an information collector, data verifier and debt recovery firm. Itreceives as many as 7,000 requests each month to verify a borrowers address andincome. It represents Dun & Bradstreet in Pakistan and offers overseas receivablesmanagement and collection for Pakistani exporters. ICIL has data that arecomplementary to a CIB. Senior people at ICIL have expressed interest in working

with an MFCIB.

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In sum, Data Check collects information from financial institutions and on credit cardholders; JCR-VIS gathers publicly available data on delinquencies, bankruptcies andcourt cases; and ICIL does a complementary service of income verification, addressverification, and overseas receivables management for clients. Credit Chex intends

to be a one-stop shop for credit information.

C. Demand for Micro CreditsA critical factor in any feasibility study is an accurate forecast of the level of potentialdemand for a new product or service. Definitive demand and supply forecasts aredifficult in any country and more so in Pakistan where (a) economic and politicalpolicies under the new government (as of March 2008) are uncertain, (b) theevolution ofmicrofinance providers is unclear, and (c) double counting of borrowersis common.8

In the course of this study, there was much anecdotal evidence that the market for

microcredit is growing rapidly and will continue to grow. This evidence came fromMFCIB supporters and thus has a built-in optimistic bias. On the other hand, if theMFPs and the GOP take most of the actions listed in Section A above, and then theinformal forecasts collected below may prove conservative.

Here are the estimates provided by those interviewed:

1. PMN estimates there were 1.45 million active borrowers in the MF sector atthe end of 2007, and the outreach is expected to grow to a minimum of threemillion active borrowers by 2010. In Lahore alone, microfinance outreach grew8% in just the last three months of 2007.

2. Shore Bank International estimates there are 10 million households inPakistan in need of microfinance, and only 10% of them are catered to currently.Shore Bank says there should be about 3 million active MF borrowers in 2010.

3. The Financial Sector Strengthening Program (FSSP) estimates there are nowabout 1.3 million active MF borrowers in Pakistan but admits that the actualnumber is unclear since there may be not only double counting in the rural areasbut also many borrowers may not have been counted. This uncertainty isemblematic of the difficulties of measuring and projecting.

4. The number of clients for Asasahs small business loans has doubled eachyear since 2003, reached 58,000 in 2007, and they are projecting 500,000 clientsby 2011.

8If the size of current and future demand is uncertain, so is the supply sidethe availability of funds

to finance the anticipated rising demand for micro credits. The CEO of one RSP argued that to reach10 million poor clients in Pakistan, the MF market will need billions of dollars of liquidity, and where isthat going to come from? Domestically, it is not available, he stated. See sections IV B and C below

for more on this topic.

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5. First Microfinance Bank expects to grow from 150,000 customers at the endof 2007 to at least 500,000 by 2010 and to 1 million a few years after that.

6. Some large commercial banks such as National Bank of Pakistan, Habib

Bank and Allied Bank are now starting to provide smaller loans, moving downmarket to capture the anticipated demand, especially as the poor graduate toSME status.

7. Kashf has 250,000 active clients and is aiming at 500,000 clients by the endof 2008 and 1 million by 2010.

8. Network MFB foresees a growing MF business and much potential in themarket. Networks credits have grown from PKR 50 million in 2005 to PKR 80million at the end of 2007. Management expects new loan volume to double toPKR 160 million at the end of 2008.

It seems clear from these estimates that the active participants in microfinance tendto disagree on the size of the actual and potential market but all are quite optimisticabout its trajectory. A realistic estimate of the outstanding MF portfolio nationwide atthe end of 2007 would be 1.4 million active borrowers, defined as those with loanscurrently outstanding but not including those who have taken loans but repaid them.

If we assume gradual improvements in operating efficiencies, the outreach couldgrow by 20% a year maximum. A good scenario range would be flat to 20% growthin demand depending on the availability of funding, greater investor interest, and thecapacity and willingness of MFIs (esp. MFBs) to manage the growth. For illustrativepurposes, we can assume a conservative growth rate of 10% per annum and a moreoptimistic growth rate of 20% per annum for the next five years and analyze theresults. During those five years an MFCIB could be established and ideally be ableto handle the increasing number of inquiries.

Note that the slower rate of demand for MF yields 1.8 million active borrowers by2010 which is considerably lower than the three million forecast by both PMN andShore Bank International. A 20% increase each year in active borrowers yields anestimate of over three million active borrowers by 2012, but this still lags theforecasts of the two prominent organizations. In fact, to meet their forecast of three

million by 2010, the growth rate of demand for new loans would have to exceed 30%per annum. This rate may be possible but it is uncertain given the obstacles cited.

10% annual growth rate 20% annual growth rateof MF demand at year end of MF demand at year end

2007 1.35m active borrowers 2007 1.35m active borrowers2008 1.49m 2008 1.62m2009 1.63m 2009 1.94m2010 1.80m 2010 2.33m2011 1.98m 2011 2.80m

2012 2.17m 2012 3.36

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Under these two growth assumptions, there is scope for an MFCIB to grow abusiness, especially if donors provide a grant to cover the costs of the first year ortwo. With fewer arrears and defaults due to the MFCIB, donors could plan onphasing out their contributions to MFPs over time, which would be consistent with

government policy of encouraging domestic savings. (See next section.)

An urgently needed input from donors is funding the harmonization of the diverseMIS systems of MFPs, permitting them to integrate their data bases smoothly andquickly with the MFCIB. In addition, the Financial Sector Strengthening Program(FSSP) has expressed willingness to facilitate the creation of an MFCIB withfinancial technical assistance.

D. Growing Competition in the SectorThe poor in Pakistan do not have access to the formal banking sector and are waryanyway of its rules, costs and intimidating edifices. When in need of liquidity for

essential purchases, the poor seek out informal sources of funds, such as relatives,traders, shopkeepers, and money-lenders. It is estimated that more than 80 percentof the credit supply for the poor comes from these sources. Interest rates can rangefrom 50 percent to 120 percent per annum.

MFIs have made substantial inroads into tapping the poorer segment of Pakistanisociety. Despite the inherent limitations of rural travel, illiteracy and operationalcosts, MFIs are able to do a rather thorough credit check on their microfinanceborrowers, urban and rural as well as new and repeat customers. Their creditevaluations usually entail, but are not limited to, the following procedures:

Verifying the persons ID by NIC Acquiring two personal references and doing checks on them as well Gathering opinions of group or villagers or neighbors who know the borrower Refusing loans to those who have loans with other MFIs Signing promissory notes or affidavits Using eCIB to see if the person has a credit history or default record Determining a clients cash flow and economic capacity to repay Making loans only for productive business purposes Verifying the place of business and visiting the site to see business cash flow

and customer satisfaction Meeting with local groups regularly Checking utility bills to confirm place of residence and see if payment is made

This is a fairly exhaustive checklist, and when group guarantees, extensive personalMFI follow-up, social pressure, and lenders zero tolerance for late payments areadded to the picture, it is little wonder that the MFIs claim virtually nil delinquencyrates and 100% recovery rates.9 Offsetting these claims of good performance are

9The picture is not quite that simple. Two caveats are in order. Caveat #1: MFIs definitions of

default and delinquency are known to differ. For example, in many cases the word delinquency is

not used until the loan is more than 30 days late, by which time they have usually been collected andthus dont count as delinquent. MFBs and commercial banks, on the other hand, do use the

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two facts: (i) other data sources show MFI portfolio quality actually declining, and (ii)most MFIs agree that there is a need for an MFCIB to help sift borrowers and sortout the competitive environment.

There are two types of competition affecting the microfinance market in Pakistan.A. The first type of competition results from the proliferation of MFPs,

particularly in the Lahore area, where pro-poor lending institutions are expandingtheir outreach and overlapping each others territories. This is an uncomfortable shiftfor MF providers since many of them did not have to worry about competition in thepast. Now MFPs complain that their customers are being poached by aggressivemarketing on the part of other MFPs.

One counter-productive consequence of the greater competition for MF clients hasbeen that different lenders often make loans to the same rural person, not knowingthe persons total indebtedness and hence capacity to repay. This situation can be

eased considerably by an MFCIB that screens clients better and helps reveal aclients total obligations, hence reducing risk of default. The World Bank hasconfirmed in a recent study that such a benefit occurs, citing experience in AndhraPradesh India. In fact, microfinance has been linked successfully to credit bureaus inBosnia, the Philippines, El Salvador, Bolivia and South Africa as well.

Other research10 reports similar findings, namely that greater competition among MFlenders has increased problems of borrower over-indebtedness, reduced loanrepayment incentives, and growing arrears for MFIs. The weakening performance isdue in part to the absence of information sharing in these markets. Pakistan is notthe only country then where MFIs have spread out over the same region and offeredthe same kind of services to the same kind of clients, and with the same results.This experience is repeated in Latin America (Bolivia, El Salvador, and Guatemala)and in Africa (Benin, Egypt and Morocco).

MFIs in Lahore have known for years about their clients multiple borrowing, butunder the pressure of competition, they have responded by (a) using predatorytactics (commission agents and staff poaching) to gain clients and to recover arrears,and (b) taking shortcuts in lending practices, such as client appraisal and monitoring,in order to provide faster loan processing time and lower client transaction costs.

MFIs in Lahore have not grasped fully yet the meaning of free and fair competition.For example, if suppliers all have similar products, they need to diversify products orlower their rates in order to draw in new clients. For the MFIs this means offeringmore housing loans, wedding loans, and loans for emergency health reasons. MFIswill be comfortable diversifying their products and market segments once their

international classification rules for overdue credits. A lack of consistent terminology skews the datareported by MFIs. Caveat #2: Data from the PMN show that given the rapid expansion of the sector,portfolio quality has actually declined at some MFPs as measured by portfolio-at-risk beyond 30, 60and 90 days. See PMNs Pakistan Microfinance Review 2006, pp. 12-13.10

Jill Luoto, Craig McIntosh, and Bruce Wydick, Credit Information Systems in Less-DevelopedCountries: A Test with Microfinance in Guatemala, The University of Chicago Press, 2007, p. 3.

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concern over credit risk is eased (enter the MFCIB), and once fair competition forcesthem to meet the differing needs of clients.

The growing competition should accelerate the spread of financial options to

underserved rural and urban areas and support the need for an MFCIB. Withmore customers will there is an even greater need for an MFCIB that can managethe demands of a larger loan base. An MFCIB will also relieve the pressure onMFP field staff who tries to juggle client screening, appraisal, loan disbursement,monitoring and recoveries11.

B. The secondtype of competition is the new trend where commercial banksare increasingly moving down market and reaching out to SMEs and slowly intomicrofinance as they see profit and growth opportunities. The big banks traditionalmarket is listed corporations, but that sector is saturated and highly competitive,causing margin squeeze. According to CGAP commercial banks have potential

competitive advantages in a number of areas compared to many MFIs, such asrecognizable consumer brand names, existing infrastructure and internal systems,established accounting systems, a stable deposit base, and access to capital12.

Abetting this trend is the State Bank, which has issued guidelines to supportcommercial banks to undertake microfinance business activities. Commercial bankshave several options in entering this market; they may open MF windows in existingbank branches, open a stand-alone MF branch, establish an independent MFsubsidiary, or enter into partnerships with NGOs and MFIs.

All commercial banks have introduced basic banking accounts (minimum initialdeposit of PKR 1000, no minimum balance) to extend their reach to low-incomefamilies and the poor. The Government is also in the process of rationalizing taxincentives to promote money transfers, mobile banking, and the use of relatedtechnology and applications for expanded nationwide outreach of financial services.

As this down-market process proceeds, commercial banks with MF branches orwindows will have a huge potential to expand microfinance outreach. Given theirresources, size and experience, they can offer their services in remote areas. Theresult will be greater competition vis--vis existing MFPs and a larger volume ofbusiness for an MFCIB.

E. Supportive Factors for an MFCIBDiscussions were held over a three-month period between September 2007 andApril 2008 with senior officials representing government agencies, private creditbureaus, commercial banks, all major MFPs (including MFBs and NGOs) anddonors. Those interviewed were invariably open and enthusiastic about a CIB to

11Pakistan Microfinance Network and Shore Bank International Ltd., The Dynamics of Microfinance

Expansion in Lahore, Islamabad, June 2007, page 16.12

Consultative Group to Assist the Poor (CGAP), Commercial Banks and Microfinance: Evolving

Models of Success, Focus Note #28, June 2005, page 1.

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cover the MF sector and they suggested many useful ideas. Their names andorganizations are shown in Annex A.

E.1. Consensus Regarding the Need for an MFCIB

The most important finding was that a new CIB spanning the MF sector is greatlyneeded and should be created as soon as possible. The near unanimity of opinion isimportant because new CIBs in other countries founder on lack of consensus. All ofthe MFIs, credit information gathers, government agencies and donors interviewedexpressed a uniformly positive attitude to the idea of a CIB dedicated to the MFsector. The fastest growing segment of new borrowers is the urban and rural poorwho make use of micro-loans. As new and potential borrowers, they represent avast data base that an MFCIB will be positioned to capture. (The eCIB is alsopositioned to capture these data.)

The Stakeholder Matrix on the following pages highlights some of the findings from a

sample of microfinance banks, commercial banks, credit bureaus, NGOs, donors,and the Pakistan Microfinance Network. A consensus on the need for an MFCIB isclearly shown. The main conclusions are as follows:

1. The overwhelming majority of stakeholders is enthusiastic and wishes tomove forward as soon as possible without further studies and delays. They citethe experience of other countries that state they wish they had started a CIB twoor three years earlier. Those most enthusiastic were most eager to commit theirown time, money and human resources to enable the startup of an MFCIB. Theywere also willing to share their customer data with the MFCIB, although somerespondents were reluctant to provide both positive and negative paymentinformation.

2. Much less interest in an MFCIB was evinced by eCIB and some of the largercommercial banks who do not envision the MF market as part of their strategicplan. The attitude of commercial banks may change, however, as the grossNPLs of the banking industry rose from 5.8% of gross advances in 2006 to 6.5%of gross advances at the end of 2007.

3. The Pakistan Microfinance Network whose members account for 96% ofmicrofinance lending is squarely supportive of a CIB. In fact, PMN has started a

pilot project for an MFCIB whose participants will be the MFPs in the highlycompetitive Lahore MF market.

4. Respondents did not seem to worry how the MFCIB would be funded. Theyassumed that the beneficiaries of an MF credit bureau, i.e., the MFIs, would find itin their interest to provide the initial capital investment. With further support fromdonors, the MFCIB should be able to sustain itself for the four or five yearsneeded to reach break-even.

Some of the opinions shown in the matrix are mixed-to-negative with respect to anew MFCIB. Several respondents were concerned about its feasibility, pointing to

the outmoded and inefficient state of MFIs MIS systems and IT infrastructure and

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the MFIs institutional capacity and willingness to make an MFCIB work. We will dealwith these issues and obstacles in Section II E.

Table 6: Stakeholder Matrix

Fig. 1aStakeholder Analysis Matrix:

Level of Interest: the Key Participants

Stakeholder Position inPakistans financial

system

Level of interestin an MFCIB

Willingness to commitresources to MFCIB

SBPs eCIBRepository of creditdata from regulatedfinancial institutions

No interest, onenot needed

Cannot, would beconflict of interest witheCIB

Pakistan MicrofinanceNetwork (PMN)

Non-profit association

of 19 MF providerscovering 95% ofmarket

Very high Is funding pilot projectfor MFCIB in Lahore

National Bank of Pak.Largest commercialbank

High; would helpour business

Yes, definitely

UBL2nd largest privatebank; frontrunner inconsumer finance

Low at themoment, not highon their agenda

Not now; moreinterested in SMEsector

ABN-Amro Large foreign bank Very little None

Credit Chex

Newest private CIB,

backed by Experianand JS Group StrongYes, in joint venturesense

Khushhali MFBLargest MFB with 1/3of market outreach

StrongVery willing; willimprove credit culture

Tameer MFBMFB trendsetter;makes individualloans

Very highVery willing; CEO isleading MF advocate

First MFBFirst & largest privateMFB

Highly interested,firmly on board

Will commit resources

PPAFMFIs main provider

of wholesale funding

Moderate; will helppartnerorganizations

Yes, some TA

Kashf Foundation Biggest NGO in MF Very highYes, would takeleadership role

AsasahFirst NGO-MFI withcommercial funding

Very high, want toreduce verificationcosts, keep PAR=0

Yes

AkhuwatIntroduced Shariah-compliant MF inPakistan

Worthwhile toshare data & learngood practices

Contribute time andeffort

DAMEN

Non-profit NGO,

loans to rural women

Absolutely clear

that we need it. Yes

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FSSP Financial TA to MFIs High Yes, TA

National RSPManages Pakistanslargest MF portfolio.

Moderate to high Yes

Punjab RSP Micro-credit not apriority; socialmobilization is

None No

Shore Bank IntlFinancial servicesprovider

High Yes

Fig. 1bStakeholder Analysis Matrix:

Timing and Information Availability

Stakeholder Marketconditions right

for MFCIB?

Willingness toshare info with

MFCIB

Extent of debtor payment history

SBPs eCIB Ambivalentresponse Notwilling/interested One year available

PakistanMicrofinanceNetwork (PMN)

Believes so, istesting it with pilotproject

Yes, PMNdatabase available

PMN not a creditor

National Bank ofPak.

Yes, both defaults& MF marketgrowing

Yes, as long asdata are secure

Some branches go back years

UBLYes, most banksmoving toward MF

Yes, need broader,deeper client data,

Three years

ABN-Amro Yes Not applicable* NA

Credit ChexVolume of MFloans too small

Yes NA

Khushhali MFB Yes, timing is right Yes, definitely 5-6 years

Tameer MFB

Yes, an MFCIBwill capture theliars, reducelending risks

Absolutely Two years

First MFBYes, MF markettaking off

Yes, both positiveand negative

About 6 years

PPAFMarket yes, MIS

noYes Two years

KashfFoundation

Yes Definitely Four years

Asasah Yes Yes, all their data Five years (not all computerized)

Akhuwat Yes, needed Yes, of course From 2003

DAMENYes, MF loandemand growingfast

Yes Ten years

FSSPYes, for pilotproject, not for

nation-wide

NA NA

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National RSPYes, needed forbetter screening ofclients

Yes Back to 1992

Punjab RSP Have no idea

Didnt see it as

needful Seven years

Shore Bank IntlYes, sooner thebetter

NA NA

* NA = not applicable

Fig. 1cStakeholder Analysis Matrix:

Issues/Obstacles to an MFCIB

Stakeholder Satisfied with eCIBprocess

Quality of eCIBrepo

Documents

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