The First MicroFinance Bank Limited (FMFB) has a very clear-cut objective. Being strictly not-for-profit, FMFB is grounded on the premise of ‘reducing poverty, diminishing the vulnerability of poor populations and alleviating economic and social exclusion’. FMFB has had an official presence in Pakistan since 2002, when it became the first private-sector microfinance bank to start operations under the Microfinance Institutions Ordinance 2001. However, FMFB was only the formalisation and expansion of microfinancing operations that had been well in place for decades — having started off in 1982 in the northern areas of Pakistan and Chitral. FMFB Pakistan comes under the eminent umbrella of the Aga Khan Development Network (AKDN) and is part of the Aga Khan Agency for Microfinance (AKAM) that has presence in more than 12 countries across Africa, Middle East and Asia. Since its establishment in 2005, the Aga Khan Agency for Microfinance (AKAM) has taken over 25 years of microfinance activities, programmes and banks that were administered by sister agencies within the Aga Khan Development Network. AKAM is a not-for-profit, non-denominational, international development agency created under Swiss law, with its headquarters in Geneva, Switzerland.
FMFB Pakistan is proud to have been ranked 7th among the top 100 microfinance institutions (MFIs) of the world in 2007 by Microfinance Information Exchange (MIX) – a leading global forum for microfinance. The President and CEO of the First Microfinance Bank is Mr. Hussain Tejany, who has over 32 years of experience in Bank of America. Prior to joining FMFB and taking the helm in 2002, Mr. Tejany had experience in community development and had served as former Chairman Aga Khan Economic Planning Board for Pakistan and director Aga Khan Education Service, Pakistan. The Chief Operating Officer of FMFB, Inshan Ali Nawaz, also has a background in banking in the multinational sector.
Presently, FMFB has a huge network with 89 branches across Pakistan, with special focus on rural Sindh and southern Punjab, “Because that’s where the highest concentration of poverty is,” says the COO. This network has been further strengthened with FMFB’s collaboration with Pakistan Post, as a result of which FMFB gained access to around 4000 of Pakistan Post’s existing outlets across the country. “This allows us to reach out without investing in brick and mortar. It will reduce the delivery cost because in microfinance, the key is to reduce the cost of delivery, to make it affordable, to lower the transaction cost for the client and to make the institution sustainable,” explains the COO.
FMFB in also in the process of initiating Business Development Services (BDS) which the COO says is going to be very relevant with the upcoming economic challenges, “The reason we started BDS is because people are going to lose their jobs now. Most of these will be unskilled, poor people out of factories and they will need to do something. So, we will give them start-up capital and give them training on how to start and manage a business. Therefore, BDS, which we’re going to pilot now, is going to be very important in the next 3-5 years in Pakistan.” Other products FMFB has on offer include housing finance (in collaboration with its sister concern Aga Khan Planning and Building Services, which provides the advisory services, whereas FMFB provides the finances) and health microinsurance for inpatient expenses (in collaboration with First Microinsurance Agency).
Microfinance in Pakistan is a healthy and growing sector that has made substantial progress in the last few years. The COO says there is a lot to be done and dismisses the notion of it being a competitive market, “Only 10% of the entire market is covered, which is around 1.85 million active borrowers. Overall, it’s not at all competitive because there is a huge market estimated between 8-10 million households which will increase, as, in the next 2-3 years given slower growth, de-stabilisation, increased taxes, tighter monetary policy, etc. will impact poverty and more people will fall below the poverty line. The market is huge; MFIs have covered 1.8 million households; that too, with just a simple working capital short-term loan, which doesn’t do much for poverty if you look at it with a holistic perspective. We are the only specialised microfinance bank in Pakistan, and perhaps globally also, which funds its entire loan book through deposits. All the other MFIs rely on some sort of funding; either subsidised funding from Pakistan Poverty Alleviation Fund (PPAF), or commercial lines of credit.”
The COO is all praises for the regulatory framework and authorities and says, “I think we have probably the best regulatory framework globally. People from a lot of countries visit and ask about our regulations, and go back and incorporate that in their structure. The regulatory authority has allowed us to establish and grow in the last seven years and fund our loan books through deposits, and the proof is right there because we have been able to grow as a bank regulated under this set of regulations. The State Bank is quite open to changes and we have consultative group meetings with them regularly, where they ask us for any changes we would want given our experiences in the field in different areas, and they take these changes and incorporate them, so it’s an evolving document.”
When questioned about the high service charges that MFIs demand from their poor clients, the COO says, “Everyone except the clients complain about the service charge or the interest rates! The clients don’t complain. From their perspective, there are two reasons for that: one, if informal sources (of credit) are to be substituted, this is much cheaper. In southern Punjab, people borrow against gold. A significant portion of the gold merchants’ revenue comes from lending against gold. The people from these rural areas go in there, give their gold and borrow at rates of around 10%-12% per month. We charge 2%-2.5% (flat rate) a month. Secondly, their return on assets is much, much higher. A couple of clients that we studied revealed that their return on assets were like 200%-250% per annum, so they can definitely afford 30% per annum as service charges on finance.”
Given AKDN’s background, it is no surprise that alleviating poverty and offering a better quality of living to the poor is foremost on FMFB’s agenda: FMFB defines poverty asa state of deprivation with respect to health and education, nutrition and security, housing and credit, and all the other conditions which are essential to human well-being. FMFB is working with a different purpose and a different model. “If you give the poor purchasing power today, they can buy education for their children, health services for their family and they can be more productive.”
FMFB is optimistic about the future of microfinance in Pakistan and the COO continues to say, “If microfinance is done from a purely capitalist point of view – just for profits and to maximise the wealth of the shareholders – then, I guess it will face the same fate as other commercial banks have faced in the last six months. But, if it is done with the perspective that it is a tool for development, and not for profit maximisation, then this is the way forward.”