Though Pakistan has been a late starter in microfinance, the country has emerged as an exemplar of microfinance and has drawn praise for the vast strides made within a short span of time.Established in 2000, Khushhalibank is Pakistan’s first licensed microfinance institution. Khushhalibank’s work in serving the massive unbanked population of the country has been nothing short of path breaking as it is only with the presence of financial institutions and efficient credit networks that people can escape the clutches of rapacious loan sharks. Since Khushhalibank’s inception, the access of Pakistan’s poor rural population to finance has significantly increased. Only when savers can deposit their money in reliable banks can it be channeled from the idle to the industrious, from the rich to the poor. With branches across the country in all four provinces, Khushhalibank’s role in poverty alleviation and economic inclusion has been integral and particularly laudable in a low-literacy, undocumented environment. Continuously stressing the importance of microfinance in raising people out of poverty, Ghalib Nishtar previously stated, “Access to a well-functioning financial system can economically and socially empower individuals, in particular poor people, allowing them to better integrate into the economy of their countries, actively contribute to their development and protect themselves against economic shocks.”
Celebrating its tenth year of successful operation in Pakistan, President Khushhalibank, Ghalib Nishtar has played a pivotal role in the success of microfinance in Pakistan. He emphasises the overarching importance of changing the entire banking framework to ensure greater financial inclusion to build a strong economic base.
The success of Khushhalibank is amply demonstrated by the private sector’s embrace of microfinance banking. Several microfinance institutions have followed Khushhalibank’s example. An ADB study published in 2007 found that “Khushhalibank has been effective, overall, in reaching out to the poor and has rapidly expanded its outreach to remote rural areas of Pakistan, consistent with the government’s poverty alleviation program.” In another report, the ADB stated that Khushhalibank has shown that it can scale outreach while remaining focused on the core goal of operational and financial sustainability and recommended that other countries follow the path of Pakistan to promote the development of a sustainable microfinance sector. Ghalib Nishtar talks to Blue Chip about what inspired his passion for microfinance and the way forward for Pakistan.
What inspired you to venture into microfinance?
Ghalib Nishtar: “I started my career at Bank of America. The founder of the bank A.P. Giannini opened the door of banking services to the common man, until then only large corporations had access to credit and financial services and only industrial corporations were considered worthy of credit risk. By placing trust in the common man, Bank of America changed the landscape of the financial industry. The microfinance revolution is similarly represents a quantum change in the financial sector. Pioneers such as Professor Yunus and Fazal-e-Abid have been able to prove the creditworthiness of the common man.
My own debut with microfinance started during my tenure at the National Bank of Pakistan, where I served as the Senior Executive Vice President for 3 years. During that time I had the privilege of working with the late Akhtar Hameed Khan at Orangi—a truly inspirational experience. We set up a Rs. 10 million banking facility for the people of Orangi through the Orangi Pilot Project to gain insight into the dynamics of Microfinance. He was truly a visionary and a man of very modern ideas. When I was going through the archives of the National Bank of Pakistan, I realised that Pakistan had started microfinance back in the 1970s. There was a complete system of documentation on the program, which was actually done by my father. It was called the Supervised Rural Credit Program. The program was started by the National Bank but was then shelved after six years. I was trying to investigate why since program portfolio was excellent. It was closed down for two reasons: one, it was politicised so when the government changed – it was scrapped; the reason given was that it was not sustainable. The bank was charging 14% interest since there was a cap on Interest rates by the central bank on lending to agriculture and we all know that microfinance cannot be sustainable at these rates. So, this was put on a back burner while similar programs in Bangladesh and other parts of the world continued to flourish and have become what they are today. I believe Yunus even visited this program when he was starting his own Institution in the early 1970s. The lesson learnt was that interventions in isolation usually do not survive. What you need to do is change the entire system and make them part of the mainstream system. Only if you are able to do that, then things move forward, grow and sustain. So the challenge is to change the system. This is where the ‘mainstreaming concept’ becomes relevant. ”
Establishing Khushhalibank has been a great achievement, how did you get started?
GN: “When we started in 2000, the challenge was how to mainstream this into the banking system. I undertook extensive research on how to start a microfinance bank. I studied the literature and feasibilities of microfinance initiatives around the world. We identified three key elements, which were: firstly, a recognition that interventions in isolation do not work, you need to change the system; secondly, to change the system you require tremendous political will. In the absence of political will systems do not change because there are forces within the status quo with vested interests which will not allow change. Once you have that, then you can go about changing the various paradigms because with the existing paradigm, which was present then, you could not do microfinance. This is how we started.”
Khushhalibank is celebrating a decade of successful operation in Pakistan. What have been the key milestones?
GN: “The first milestone was to come up with a policy for microfinance in Pakistan. The policy statement was the demonstration of political will by the state – that is how I saw it. The policy statement came out in the 2000 Budget. That was the first indicator that there was a desire for change.
The second milestone was changing the rules and regulations within the central bank so that microfinance could be done. Again, we got support from the central bank. The entire prudential regulations were changed. A totally new department was set up in the State Bank called the Microfinance Support Department; that established a new regime for microfinance banks.
The third milestone was the creation of Khushhalibank in August 2000 which was the first prototype licensed microfinance bank which would demonstrate that microfinance banking is possible.”
Since Khushhahlibank’s inception, several new institutions have been established. What are your views on this?
GN: “The route we took was that we asked the government to provide the policy and regulations for a conducive environment while the institution should be owned and run by the private sector. I think the measure of success was that if this works, the private sector will move in to this sector and over the last nine years, we have had several microfinance banks established by the private sector. Three of Pakistan’s largest NGOs have converted to microfinance banks: the Aga Khan Network converted to the First Microfinance Bank, Kashf converted to Kashf Microfinance Bank and NRSP has applied for a microfinance banking license. So, they have accepted this paradigm. This is a testament to the success of microfinance banking.
What about the outreach?
GN: “The distribution outlets have been established and outreach continues to expand. Cumulatively there are several hundred outlets in Pakistan in all the four provinces, AJK and FATA. Today, low-income households which commercial banks were not keen to work with are prime customers for these banks. They have access to all kinds of financial services: loans, savings, insurance, credit and transfers. The outreach of the microfinance sector is close to two million households today. Khushhalibank is obviously the largest and more focused on the rural and marginalized areas. I think most importantly, we have been able to demonstrate that is a sustainable way of doing banking. This is being recognised across the globe.”
The Economist Intelligence Unit recently acknowledged the vast strides made by Pakistan in microfinance. What are your views on this?
GN: “We have been recognised for the mainstreaming of microfinance. This is the new vision that Pakistan has been at the forefront of. The Economist Intelligence Unit has done a ranking of the microfinance environment and Pakistan ranked 11th. It is interesting to learn that more traditional bastion of microfinance, Bangladesh has been ranked 27th in this survey. The reason for the success is the approach we took in mainstreaming microfinance. So, Pakistan has shown that it was on the right path and was able to pursue a reform agenda of the banking system which not only changed its orientation to a pro-poor supporting low-income households, but also in developing a sustainable paradigm.”
Going forward, what needs to be done to enhance microfinance in Pakistan?
GN: “Obviously this is an evolving process and as we move forward, the regulations and environment need to be continuously made supportive. We should now be looking to what we need to do for the future. I think while all this is good, the ultimate objective is that the majority of the population within the low-income bracket should have access to financial services. We have still a long way to go on that. Since we have established the institutional framework and the basic business models, it is now time to take a quantum leap in terms of outreach to people and in terms of financial inclusion, and pursue a financial inclusion agenda for Pakistan based on access to the majority – we now need to make new investments and look at technology. The reform process has been continuous. The first phase of the reform programme from 2000 to 2006 was called the Microfinance Sector Development Programme. The next phase was three-year program 2007 to 2010 guided by the State bank of Pakistan Strategy document, and now a five-year Medium Term Development Framework for Microfinance is envisaged from 2010 to 2015.” The continuity and consistency of the reform process is critical to success.
With regard to technology, what is being done?
GN: “In terms of technology, the future is developing alternative delivery channels for branchless banking. Different institutions are pursuing their own models. We have teamed up with the Gates Foundation Global Savings Initiative and Shore Bank in terms of developing the branchless banking model for Khushhalibank. In about two years we should be able to develop delivery channels that are cost-effective and easy to access for low-income households.
Another important aspect: in the 1980s, there was a boom in consumer finance; this was basically focused on the middle-income segment, which is huge in the developed markets. But in developing countries like Pakistan, India, China and Bangladesh, the majority of the population is low-income and that is where microfinance has the potential to support these people. The markets are huge; there are good models in place so now we just need to focus on investing in technology for cost effective delivery channels and expanding outreach.”