Ladies & Gentlemen:
– I am very pleased to see you all here this afternoon. I would like to thank SEEP Network for inviting me and I greatly appreciate their work as a global network of international organizations dedicated to combating poverty through promoting inclusive markets and financial systems. It is a heartening moment that this session of SEEPâ€™s annual conference is dedicated to the microfinance industry in Pakistan and has been titled as â€œPakistan: The Dark Horse of Microfinance.â€
– I am especially grateful to the Pakistan Microfinance Finance Network which has accepted the challenge of presenting the case for the microfinance industry in Pakistan before this august forum. I hope that the conference will enable stakeholders in international forums across North America to better understand the opportunities available in Pakistan and become enthused about availing these opportunities.
– During the last 4 years, new players like mobile network operators, commercial banks, and international funds have started investing in institutions focused on the bottom of the pyramid markets and have catalyzed growth. This is especially appreciable because there was no deceleration of growth despite the global financial crisis of 2008. Moreover during these 4 years the Benazir Income Support Program has brought almost 4 million people into the formal banking sector thereby extending the coverage of our financial institutions in general and microfinance sector in particular.
Ladies and gentlemen
Today more than 2.5 billion adults in the developing world areconsidered ‘ financially excluded’ this means that they do not have access to basic financial services, such as Bank accounts , loans or savings and Insurance products. Financial inclusion has the power to promote inclusive growth and the benefits can positively affect the poorest of the population. Financial inclusion has numerous benefits.Reduced dependency on middlemen, support for entrepreneurs, facilitation of international remittances, enhancement of employment. If mobile financial services are added to the solution then the benefits can even be extended to the most rural areas of a country.Financial exclusion occurs due to the Banking industry being geared to rural areas and towards the salaried class. The Commercial Banks business model is predicated on a customer, having a credit history, security and a large ticket size be in loans, deposits or insurance.
The complicated credit product results in excluding the bulk of the population however, the excluded population has needs like the rest of us. These needs end up being met by borrowing between friend or family, informal and unsafe saving clubs or usurious money lenders. These options are often more risky, costly and less efficient.
In order to change the existing Banking paradigm, one must look at non-traditional solutions. When looking at small and medium size business models the potential lending market is vast comprising over 90% of all private enterprises employing over 78% of the non-agricultural labor force. The potential for lending outside of larger commercial banks comprises over 90% of these small and medium size businessâ€™ capital needs.
There is a wide diversity in the type of players and lending models which are gradually opening new market opportunities and promoting healthy competition. For example, today we have a model adopted by Akhuwat which is primarily based on philanthropic capital. At the same time we have conventional microfinance institutions like Kashf and lastly we have the concept of branchless banking which is being successfully practiced by Tameer Bank through its Easypaisa service.
Ladies and gentlemen, now a few words about the economic situation and investment climate of Pakistan.
– The world economic crisis of 2008 affected the Pakistani economy, as it did most developed and emerging economies. Growth rates have come down from an average of 6% to 3.5%, with inflation increasing; facts which point towards an even greater demand for microfinance capital for micro, small, and medium enterprises.
– As I see it, Pakistan offers to you the promise of land, geography and people, all combined. Perhaps it is for this potential that the US-Pakistan Business Councilâ€™s report describes â€œPakistan as a giant you havenâ€™t consideredâ€ for investment.
– Even today, nearly 600 foreign companies are doing business in Pakistan.
– Our remittance inflows have increased to a record $13 billion in 2011-12, from just $1 billion in 2000.
– The stock markets in Pakistan, like other stock markets in the world, have also shown vulnerability to exogenous shocks. However, the striking difference between the Karachi Stock Exchange and other regional markets is the formerâ€™s ability to regain lost ground rather quickly. This is evident from the pattern of the KSE index, which showed steady progress and crossed the 15,000 point in April 2008. And after plummeting to 5000 points in August 2008, the KSE has once again shown steady recovery and has crossed the 15,000 mark in Sept 2012. This provides a good benchmark for you to judge the mood of the market and changing trends in Pakistan.
Ladies and gentlemen
– Another reason for hope and optimism is the entrepreneurial ability of Pakistanâ€™s strong middle class. By 2025 Pakistan will be one of the six countries in the world with a strong middle class of over 100 million people. And thanks to their resilience and innovative cooperation; the share of SMEâ€™s has gone up in our GDP in the aftermath of the recent crisis.
– To overcome the difficulties experienced by small and medium size businesses in accessing capital, the US Government has launched the multi-year Pakistan Private Investment Initiative (PPII) to attract both Pakistani and international investment management companies. These participants can invest alongside USAID in small and medium size business opportunities. This is indeed a very welcome development.
– Furthermore, Pakistan has one of the most liberal and attractive investment regimes in the developing world. There are no restrictions on the share of equity that foreign companies can hold, and almost all sectors of the economy are open to foreign investment.
– To provide effective dispute resolution remedies to foreign investors, Pakistan has implemented Bilateral Investment Treaties (BITs) with 47 countries – the largest number for any country in the world.
– The text of the Pakistan-US BIT was finalized earlier this year in Washington. Negotiations on NCMs continue, which we hope to conclude as soon as possible.
– Pakistan has also signed agreements on â€œAvoidance of Double Taxationâ€ with 52 countries. This coupled with low corporate tax rates and a cost of doing business that compares quite favourably to its peers in the region.
– Up until the global recession in 2008, Pakistan was averaging over US$ 5 billion annually in FDI receipts. US contribution to the total FDI was by far the most significant. The contraction that we have experienced since then mirrors the global trend, and I am confident that once the economic crisis affecting Europe abates, we will witness a real rebound in investment flows to Pakistan.
Ladies & Gentlemen:
– As news reports go nowadays, Pakistan, indeed, may seem like a bold choice for many of you. But donâ€™t be surprised when I tell you that Pakistan is the most urban country in South Asia, even more so than India. We are the sixth largest country in the world and soon to be the largest Muslim country. While most countries confront the worrisome prospect of graying populations, nearly sixty percent of our population consists of youth under the age of thirty.
– Pakistan today boasts a fiercely independent judiciary, a vibrant and free media and a responsible, organized and motivated civil society; all contributing towards a truly enabling business environment.
– The people of Pakistan are strong and resilient, having stood bravely through many natural calamities and manmade disasters. Pakistani people, especially young people, are innovative and creative, expressing their genius in business, arts, literature; doing so much even in hard times.
– In fact many of you may not be aware that we are the ninth largest English speaking country in the world. For this reason we are consistently favored as a destination for business process outsourcing. Through internationally recognized schools and universities such as LUMS we have the seventh largest pool of scientists and engineers as well as an array of innovative entrepreneurs working to solve our the most pressing challenges of the 21st century. Even Pakistanâ€™s renowned pop-music industry is bigger than Indiaâ€™s. And hardly a year goes by when a Pakistani student does not set a world record in international exams such as the O and A levels.
– The use of modern technology is increasing rapidly in Pakistan. The first quarter figures for this year suggest that Pakistan, with 29 million internet users, has the 20th largest population of users of the worldwide net in the world. This does not include upstream mobile users subscribers who number approximately 70% of the total populationâ€“ the highest penetration in South Asia. For investors such as yourselves, the potential for cutting edge microfinance innovations and market testing in the realm of mobile money, alternative credit scoring, and information and communication technology (ICT) platforms is truly remarkable.
Ladies & Gentlemen:
– On a regional scale, Pakistanâ€™s geography is important not only strategically but as a vital economic gateway. Our location offers significant advantages for trade and commerce as Pakistan has common borders with two of the worldâ€™s largest markets and emerging economic power houses – China and India; countries that are set to become the engines of global economic growth in the 21st Century.
– The energy that will fuel the growth in the region and beyond, is also in abundance in neighboring Central Asia, Iran and the Middle East; giving Pakistan the indisputable potential of emerging as the most cost efficient and preferred energy transit route. To harness the potential that this geographical advantage offers, we are making the required investments to develop the national trade corridors.
– For example, we have recently renegotiated the transit trade arrangement with Afghanistan under the Afghan-Pakistan Transit Trade Agreement (APTTA).
– In addition to concluding a Free Trade Agreement (FTA) with China, Pakistan has taken some very bold steps to normalize its trading relations with India. This of course will stimulate growth and expand investments for both Pakistan and India.
Ladies & Gentlemen:
– Let me take this opportunity to highlight some specific positive macro-indicators which have created a conducive climate for the microfinance industry; starting with the decrease in discount rates and inflation rates.
– The discount rates, which are strongly linked with inflation, shot up to a staggering 15% after the global economic crisis in 2008, with inflation also crossing 15%. Making lending extremely expensive these high discount rates were most unfavorable for new investment, which is why private borrowers opted for BMR rather than new capital investments. This situation has been remedied.
– Government has managed to control inflation and brought down discount rates to 10.5%; a percentage that supports increased capital investment.
– Furthermore, there has been a significant improvement in the currency to deposit ratio, and a considerable deceleration in growth of Non Performing Loans (NPLs). Both of these factors, combined, suggest that local banks have sufficient liquidity to support feasible projects and there is a desire for expansion in private sector credit which favors new investment and market outreach.
– From the investorsâ€™ perspective, the availability of foreign exchange can be the most essential criteria which needs to be considered in making investment decisions and Pakistan has maintained sufficient foreign exchange reserves to meet these needs. We have never defaulted on our sovereign debt. There is no danger of doing so in future either.
Ladies & Gentlemen:
– There is no getting around the fact that Pakistan today confronts some serious challenges, foremost amongst which is the impact of years of war in Afghanistan. Of all the countries in the coalition working to stabilize Afghanistan, none has paid a heavier price than Pakistan.
– The economic cost alone is of staggering proportions for a country of the size and means of Pakistan. Yet I have little doubt about the resilience of the Pakistani people and their ability to overcome these challenges.
– Recognizing economic opportunity as a factor for sustained peace, as the paroxysm of conflict and the accompanying terrorism abates, Pakistan is emerging as one of the largest and most friendly markets in the world outside of China and India. Opportunities abound both in Pakistan and the economically vibrant region located at our doorstep. We invite you to be our partners in our growth venture and our mission, which holds great promise for those who are willing to seize the opportunity.
Ladies and gentlemen
– We all know that the social value of microfinance relates to improving the lives of poor and excluded people; widening the range of opportunities for communities in an ongoing, sustainable way both by broadening and by deepening outreach of financial services. Your services help in reducing vulnerability and the fulfilling basic needs of the people at the bottom of the pyramid.
– The challenge in Pakistan is not demand as it has over 30 million in potential unbanked customers, it’s not regulations , Pakistan has one of the best regulations for Microfinance and Branchless banking, it’s not profitability, the industry will generate a profit, it’s not passion.The challenge for scaling up is lack of well capitalized institutionswhich are able to access both local as well as international markets due to their financial strength and governance standards.As the number of institutions reaches this level the industry will start to experience growth. International players can get in at the ground level, to harness their capital with local expertise. The market has seen two international players entering the market at reasonable costs. Pakistan presents the opportunity for international players to scale and make a return on their investment.
I urge you policy makers and industry practitioners to come together to make microfinance available across the depth and breadth of Pakistani society; to take care of possible pitfalls that lie in the way of the greater good and to reach out to the poor in rural, semi-urban or urban areas to enable them to raise their income levels and improve their living standards.
Washington D.C – 07 November 2012