An interview with Hussain Tejany, President of FMFB Pakistan

Hussain Tejany: “I have been part of the Board of Directors of the Aga Khan Rural Support Programme (AKRSP) for the last 17 years. The First MicroFinanceBank was created through a structured transformation of the credit and savings section of AKRSP. As the World Bank’s evaluation report on AKRSP (titled “The Next Ascent”) says, “For 18 years, the AKRSP has helped community groups throughout the Northern Areas and Chitral District of Pakistan in a development effort that has become a model for rural programs throughout the country and across the globe. About eight major programs or projects in Pakistan have drawn substantially from AKRSP experience.”

The First MicroFinanceBank Ltd. of Pakistan was formally inaugurated in March 2002. Having served on the AKRSP Board, I was fortunate to get an opportunity to play a lead role in the transformation process and since then have been the President of the Bank. The Bank has seen exponential growth in the last few years and today, we have a widespread network of 89 automated branches all across Pakistan with over 315,000 customers. Before joining the FMFB, I was associated with the Bank of America and have over 40 years of experience in the banking sector.”

HT: “FMFB was created with the mission to alleviate poverty through sustainable economic development and a non-commercial objective of recovering only its inflation adjusted costs. In a short span of six years, the Bank has reached out to thousands of poverty-stricken households by disbursing over 400,000 loans amounting to Rs. 7.206 billion and mobilised Rs. 3.317 billion in savings from over 145,000 depositors by December 2008.

FMFB registered unprecedented growth rates in the last 3 years. It has been one of the fastest growing MFIs in the world. Just to give you a few examples, our active borrowers registered a growth of 226% from 2006 to 2008 and our loan book registered growth of 314% from 2006 to 2008.

In 2007, while we undertook growth we also positioned ourselves for growth in 2008 and beyond. This was done by putting up our strategic distribution channel. We established 36 additional branches in 2007 and another nine in 2008, primarily in the very poor rural markets, taking the total number of branches to 89 of which approximately 44% branches are in Sindh and 34% in Punjab, mainly in the rural areas. To leverage the strategic distribution network, FMFB entered into a unique and innovative public-private partnership with the Pakistan Post. A major breakthrough in Pakistan’s micro-finance sector, this alliance will provide the Bank with an opportunity to utilise 4000 Sub Offices of the Pakistan Post to increase access and outreach to quality and sustainable micro-finance services for the very poor and vulnerable populations; especially women, residing in the rural and urban areas of Pakistan.

To take a look at the Bank’s impact, let us now consider the depth of outreach, which is the level of poverty which is served by microfinance. One of the most widely used and popular proxy indicators for the depth of outreach is the size of the loan outstanding. For FMFB, that size is Rs. 12,400 ($ 155). The Bank reaches out to the poorest segments of society. Based on a sample, 76% of the FMFB clients live below $1 per day and 24% of the clients live below $1-$2 per day. Given that 71% of poor in Pakistan are women, FMFB has focused on providing financial services to women and as a result, about 40% of FMFB borrowers are women entrepreneurs.

Yet another aspect of poverty targeting is the geographic area in which FMFB operates. With the vast majority of the poor residing in the rural areas of Pakistan, over 70% of the cumulative loan amount disbursed is in rural areas. In Working Paper No 2 of the Pakistan Resident Mission Working Paper Series of Asian Development Bank, a review of evidence was conducted by Sohail Malik, titled Agriculture Growth and Rural Poverty, where it was concluded that cotton/wheat zone of Sindh (which is rural Sindh) and cotton/wheat zone of Punjab (Southern Punjab) possessed the highest percentage of poor to the percentage of population residing in these areas. The area houses 33% of the total poor with only 29% of the total population. FMFB operates over 40% of its branches in rural Sindh and southern Punjab.”

HT: “As acknowledged globally today, microfinance is one of the most effective tools for poverty alleviation. Let me first tell you how the FMFB defines poverty. We define poverty not only as a matter of income, but rather as a state of marginalisation in all of those conditions which contribute to the quality of human life. A state of poverty is a state of deprivation with respect to health and nutrition, education and security, housing and credit, and all the other conditions which are essential to human well-being.

Funding efforts can only be effective if they enable the poor to make a holistic improvement in the quality of their lives. The funding should not only help individuals enhance their economic activities but should enable them to form financial, human and social capital for a sound and secure future. These aspects can only be addressed over a period of time by a financial institution which is permanent in structure, sustainable in resources and one that can offer a targeted set of financial and non-financial services.

The Aga Khan Development Network realised that the efficacy of the funding needed to be enhanced. This could only be done by moving away from microcredit and into microfinance and also by connecting the microfinance institution, and through it the people it serves, with the mainstream financial industry.

Many NGOs and RSPs in the microfinance sector in Pakistan are now following this trend and contemplating moving toward the regulated financial sector. A daunting task, it is the right move towards making a meaningful impact in the lives of the poor.”

HT: “Today, microfinance is widely accepted as an effective tool for poverty alleviation. Pakistan has made considerable developments in microfinance in the last few years.
One has to keep in mind that poverty is a complex phenomenon which demands a multi-sectoral approach and comprehensive strategy. Some of the major challenges which MFIs need to address effectively to sustain their programmes, etc. are:

·         Mobilisation of funds to meet the growing demand of credit

·        Increase outreach – reaching out to the poorest of the poor residing in the rural areas of Pakistan while keeping the cost of delivery low and operations sustainable is a great challenge

·        Sustainability of microfinance initiatives – as mentioned earlier, poverty alleviation requires long-term intervention and therefore the initiative and/or institution needs to be sustainable to protect the interests of the poor and meet their future needs.”

HT: “The First MicroFinanceBank operates all across Pakistan and many of our customers have in the past been exploited at the hands of moneylenders. Informal moneylenders, as you are well aware, often charge usurious interest rates on loans and often exploit the poor who are in dire need for finances. If you look at the rural areas, poverty is rampant there and it is here that the majority of individuals depend on agricultural activities to make a living and are more prone to fall into the vicious circle of poverty due to bad crop seasons. The class of farmers under discussion is living below the poverty line, totally dependent on loans for farm inputs. Credit requirements of the farming sector have increased rapidly over the past few decades as a result of the rise in use of fertilisers, pesticides, improved seeds and mechanisation, and hike in their prices. With this backdrop, small farmers who do not have direct access to formal lending institutions are trapped in the net of informal lenders better known as the zamindaar in the region.

With microfinance institutions offering credit services to the poor, it is quite evident that informal money lenders are now not the preferable source of borrowing for the poor. Many of our existing clients have in the past been exploited by money lenders. And have been able to bring a positive change in their lives by moving away from informal lenders and working with a formal financial institution.

Over the past many decades, farmers in Pakistan have been exploited as debt slaves by informal lenders who have been the common oppressors of farmers in the region. The farmers have been forced by the lenders to buy substandard fertilizers at high prices and to sell their quick decaying products like vegetables, fruits etc. at throw-away prices where they could not get even the cost price of their produce.

Abdul Hameed’s story is common to the many oppressed farmers in Pakistan. A hardworking haari (farmer) without any access to financial resources from a formal institution, Abdul Hameed was forced to buy seeds and fertilisers of substandard quality at a higher rate from the local zamindaar. He also had no choice but to sell his produce to the zamindaar at rates which were lower than the going market rates. Each season, Hameed was left with very little profit to survive on and feed his entire family. When Abdul Hameed came to know about The First MicroFinanceBank, his life took a complete turnaround. With the help of a small loan from the Bank, Hameed was now in a position to buy the best quality seeds and fertilisers at much lower rates. Earlier, what he used to purchase at Rs. 1300 from the zamindaar was now available (of a superior quality) from the market at Rs. 800. Today, Abdul Hameed dreams and hopes of a better future for his children, as he earns a living that provides for their education and allows him to save for better times to come.”

HT: “The recent civil strife did not have a major impact on the FMFB operations and the Bank continued reaching out to the poor and providing them with complete banking services. However, the large scale political turmoil witnessed by the country as a consequence of a political leader’s assassination on December 27, 2007 had led to some of our branches in Sindh getting badly affected leading to operational disruptions and heavy financial losses. Four of our branches namely Larkana branch, Jacobabad branch, Badin branch and the Tando Muhammad Khan branch were completely destroyed. Assets of all the branches were completely looted.

However, these branches were immediately rebuilt, refurbished and operationalised at a significant amount of Rs. 7 million. FMFB ensured that there was no disruption of services and alternative arrangements were made to provide normal banking services to the local clients of the Sindh region in the shortest possible time during the transitional phase.”

FMFB targets women in rural areas. What kind of support and educational programmes do you offer regarding financial education and financial management? 

HT: “The First MicroFinanceBank focuses on women as more than 71% of the poor in Pakistan are women. In addition to providing credit, savings and insurance services to them, the Bank has recently launched Business Development Services (BDS). BDS has been tailored to serve the needs of the chronic poor who live much below the poverty line and can barely make their ends meet. Through BDS, FMFB provides trainings in business management and technical skills along with financial services, both to new start-ups and existing enterprises. We are also providing services on community-level for collective buying, collective selling, warehousing and storage facilities, community schools and health centres. These interventions shall be supported through seed capital (financing for untested new ideas). BDS takes an integrated approach aimed at building entrepreneurial as well as financial capacity of the clients. The focus is on women who have some technical expertise like tailoring or stitching but lack the necessary business acumen.”

HT: “FMFB began a programme of urban microcredit in Rawalpindi and Karachi in 2002. The overall approach and strategy in urban centres is the same as in the rural areas and is in consistency with the institution’s philosophy of development whereby the Bank enables poor individuals to become self reliant. FMFB has been successful with its strategy in the urban centres also.”

What are your views on the microfinance industry as a whole?

HT: “Pakistan has made considerable developments in microfinance. Though NGOs and RSPs have been providing microcredit in the country since the 1980s, the coverage and scope of their operations had generally been rather limited. The enhanced international focus on microfinance at the advent of the new millennium has accelerated the growth of the microfinance sector in Pakistan. MFIs need to address all the causes of poverty by not only offering financial services for income generating activities but also to help create access and affordability to health, education and housing service. There needs to be an effort to improve the overall quality of life of the under-privileged segment.

Key players in the sector must make concerted efforts to focus on institutional development to ensure that their structure is kept sustainable. It is only through developing an efficient financial systemwhich performs the function of intermediation between those with excess savings and those in need of funding for activities with high returns, that MFIs can offer hope to the poor populations to attain a secure and dignified future in a sustainable manner. Additionally, reliable and sustainable structure will allow MFIs to generate as much resources as required for growth.

In recent years, SBP has taken various steps for the promotion and growth of this sector. In order to expand microfinance outreach to 3 million borrowers by 2010, a strategy for ‘Expanding Microfinance Outreach’ (EMO) has been developed by the SBP which was approved by the Government in February 2007. For the microfinance sector to flourish, it is imperative that there is consistency in the policies and that a conducive policy environment prevails for the micro-finance players in Pakistan.”

HT: “Over the last few years, the Government has played an instrumental role in establishing and promoting the microfinance sector in Pakistan. Pakistan is one of very few countries in the world and perhaps one of the first ones which promulgated a separate legal and regulatory framework for microfinance banks (MFBs). This framework provides an enabling environment for the provision of microfinance services to deserving segments of the country. So far the State Bank of Pakistan (SBP) has guided the industry in an extremely professional manner. If SBP is able to continue with that approach by focusing on building SBP regulated financial institutions which rely not on grants but on market based resources to become self reliant, we will see an effective industry come up based on solid foundations.”

HT: “The major concern of the poor is to have access to credit at affordable rates. Microcredit, if utilised appropriately by the micro-entrepreneur, proves to be a far less expensive source of credit for the borrower as compared to suppliers’ credit and informal borrowing. Therefore, the borrowers have immediate gains. There is also a need to understand that the poor population should be segmented according to their levels of poverty and different strategies need to be designed for these different segments. If products and services designed for the transient poor are offered to the chronic poor population, it will end up being an ineffective and expensive and inappropriate option for the borrower.

One must also realise that the administrative costs for micro-lending are a lot higher than normal lending. Door-to-door marketing is undertaken. Staffing costs are higher. Transactional costs are higher. The service charges need to cover these costs. This is an issue faced by microfinance institutions all around the globe. However, the problem as it is made out to be, does not even exist in the minds of the clientele. The poor who have limited access to financial resources are willing to pay the service charges since they can get away from being exploited by informal lenders (who charge a much higher rate) and the high returns on their businesses allow them to pay a nominal service charge to the microfinance institution. By borrowing from a microfinance institution, the poor borrowers are much better off.”

HT: “A solid institutional base has positioned FMFB to grow leaps and bounds in years to come. The Bank envisions being one of the largest microfinance banks in the world in the next 3-5 years. With a continuing focus on increasing outreach to the poorest populations of the country while being a sustainable institution, the Bank is geared up for a challenging future. Continuing its focus on increasing access and outreach to the poorest segments of the country, FMFB plans to have 330,000 active borrowers by the end of the year 2009. This means that the Bank plans to increase the number of active borrowers by 71%. To maximise outreach, FMFB plans to pilot Mobile Vehicle Banking in remote areas where the poor populations do not have access to any formal financial institutions. As part of the institutional building efforts, FMFB has made significant investments in Information Technology and Risk Management. In the year 2009, countrywide connectivity of all FMFB branches; development of collaborative applications to increase productivity and infrastructure to launch mobile banking/branchless banking will be completed.”

INDICATORS	2005	2006	2007	2008
Number of active loans	17,088	52,679	102,604	171,795
Cumulative Number of loans disbursed	39,622	91,510	195,964	403,838
Number of deposit accounts	27,937	39,161	81,158	144,898
Number of total clients	45,025	91,840	183,762	316,693
Total Loan amount disbursed (US$ MM)	18.02	32.44	56.86	88.80
Loan amount outstanding (US$ MM)	5.21	9.88	17.63	26.30
Deposit Base (US$ MM)	9.33	13.27	29.28	40.87

Rehana, from Hyderabad, Sindh is one of the many individuals who had seen extreme poverty in her early life. Her struggle with poverty continued as she was married at a young age to a man with very modest earnings. Difficult times, the need for finance and the lack of access to financial resources through a formal institution led her to an informal lender. She was forced to keep her only personal asset, her gold wedding set, as collateral in exchange for Rs. 5000. The informal lender better known as wania in the Sindh regions charged a high interest rate and Rehana ended up paying Rs.500 as interest every month. For eight long years, she continued paying the high interest rate while her principal amount remained unpaid. It soon became obvious to Rehana that the financial help was nothing more than a heavy burden as she would never to able to pay off the informal lender. The only gold that she had ever owned in her life was now lost forever. Undeterred by these hardships and with the dream to give her children all that she did not have during her childhood, Rehana decided to start earning a living by selling bed sheets in her own neighbourhood. Rehana was one of the many ordinary women who, not having access to financial services, had been forced into the clutches of informal lenders. Approached by The First MicroFinanceBank, Rehana took a small loan to expand her business. Today, she has been able to turn her life around by increasing her earnings and improving the quality of life for her entire household.