For Improving Access to Financial Services - Legal & Regulatory Framework, the consultants of Asian Development Bank have suggested to the Ministry of Finance & State Bank of Pakistan to utilise the terms recently introduced by Consultative Group to Assist the Poor (CGAP) of "bank-based" and "telcom-led", where innovations may be introduced by telecommunication companies and experts, but where legal responsibility resides with the (micro-finance) banks.
On the use of subsidies to support Increasing the Outreach of Financial Services, Consutant's recommends that SBP develops clear rules on performance and accountability in order to break away from using subsidies as has been done in the past which did not result in the sustained increase of popular savings and self-sustainability of MFI's.
As regards the regulatory framework for Micro-Finance Banks (MFB), the experts strongly recommends SBP to invest time in conceptualising a detailed and firm licensing process that is clear and consistent with the government's decision to only integrate self-sustainable MFI's that can attract and protect (poor) people's savings into the formal financial sector.
This includes having a clear policy on licensed MFB's that are consistently loss-making and produce unclear financial reports, they added. Regarding a possible increased role of Post in micro-finance, the experts recommended that central bank, being responsible for the safety of public savings, proposes the Post, who legally falls under the responsibility of the Communications Ministry, and to the Finance Ministry, a partnership for undertaking an extensive supervisory exercise.
Consultants reports pointed out that the legal experts are strong supporter of micro-finance services providers that are legally established as Co-operative Societies. It also needs to be clarified that co-operative societies are Non-Profit oriented institutions: as financial businesses they need to make profits but these are reinvested in the organisation and not distributed as dividends.
Legal experts stressed that (i) the central bank is not an expert of co-operative societies, (ii) the constitution dictates that the provinces are the regulator of co-operative societies, (iii) a co-operative society is a proper legal statute different from companies on the one side and associations (and trusts) on the other and (iv) regulation only makes sense when it has adequate resources to ensure full compliance (hundreds, if not thousands credit union - like organisations may come up as a result of a government support program).
According to the consultant report, the central bank role would be to provide technical know-how and avoid failures. SBP does not have the role, nor the resources to effectively supervise (small) credit unions that do not collect (and on-lend) public savings, they added.
In details report, the experts applied a structural review underlining the importance of clarity, coherence and consistency (CCC) within and between the constitution, policies (such as on the financial sector, enterprise development, poverty alleviation, consumer protection), laws, regulations, definitions (such as on the use of the terms MFI and MFB), prudential norms, sanctions, guidelines.
Analysing the Pakistan Post Office organisation and its financial services, the experts founded that this public service organisation is the largest MF services provider by far, collecting a large volume of savings (through products of the Post, the Savings Bank and the National Savings Directorate), undertaking a huge number of different money transfer services, and providing life insurance and loans.
The Post recently entered into a co-operation agreement with a micro-lender, FMFB and it seems to consider providing loans on its own. According to the legal experts, some issues in the collaboration with FMFB seem unresolved and require further attention. He discussed his findings with Post and FMFB who agreed to collaborate closely to resolve several issues identified by the expert.
The international legal expert prepared a strategic note on possible Post and Microfinance Bank partnerships. Based on legal documents available to him and based on his experience in other countries and with international organisations dealing with the (potential) role of Post in MF. According to report, Co-operative societies have always attracted a lot of attention as an ideal legal form to organise financial services provision for poor, rural people and small businesses.
Pakistan has witnessed experiments with co-operative banks which resulted in the closure of nearly all of them and in huge losses of government money and people's trust, especially of poor and rural citizens. This past notwithstanding, SBP is looking at revitalising the credit unions (that are co-operative societies in legal terms).
The experts reviewed SBP's Credit Unions (CU) paper that was written based on international papers (in particular from World Council of Credit Unions (WOCCU) and work of the expert done during his first mission. The expert then developed principles on CUs to be set up in Pakistan. On the basis of these CU principles and with the reviewed SBP CU document, they designed a possible CU program with implementation plan. With advise of the strategy expert, the legal experts proposed a specific, step by step plan for creating a Community Investment Fund that uses Smart Subsidies for accelerating financial inclusion in the country.