Consumer Credit Analysis
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This document summarizes the State Bank of Pakistan's efforts to promote financial inclusion and consumer protection in Pakistan. It discusses SBP's multi-pronged strategy, which includes requiring banks to offer basic low-cost accounts, expanding branch networks, developing regulations for microfinance and branchless banking, supporting a national financial literacy program, and establishing a legal and regulatory framework for consumer protection. It also describes the Financial Innovation Challenge Fund's second challenge round focusing on innovative rural and agriculture finance to improve financial access for rural communities and small farmers in Pakistan.
Consumer Credit Analysis
- 1. ASSIGNMENT CONSUMER CREDIT ANALYSIS PRESENTING TO: Prof. Khalil Rao PRESENT BY: Ahsan Azhar Hamad Ahmed
- 2. Financial Inclusion, Consumer Awareness and Protection,
- 3. The importance of financial services in the development of any economy cannot be overemphasized as it promotes entrepreneurship, generates employment, fosters innovation, reduces poverty levels and enhances social equality. Therefore, SBP, as part of its financial sector development strategy is actively promoting financial inclusion. Financial Inclusion refers to the process of promoting affordable, timely and adequate access to a wide range of regulated financial products and services and broadening their use by all segments of society through the implementation of tailored and innovative approaches including financial awareness and education with a view to promote financial well-being as well as economic and social inclusion. To add further emphasis and urgency to the issue of financial inclusion, I would like to share that financial sector in Pakistan remains restricted in its outreach as the majority of population remains either excluded or informally served. This limited access is reflected in the total number of bank accounts, presently around 32 million, and the total number of borrowers, which is only 5.7 million.
- 4. SBP is cognizant of high financial exclusion in the country and is fully committed to tackling the associated challenges in a sustainable manner. State Bank of Pakistan is pursuing a multi-pronged financial inclusion strategy through the following: 1. SBP introduced Basic Banking Account (BBA), requiring commercial banks operating in Pakistan to offer BBA to facilitate and provide basic banking facilities to the low income people in Pakistan. A typical BBA can beopened with a minimum deposit of Rs1,000 carrying no fee, no limit of minimum balance and offering full ATM facility. 2. SBP has introduced the Annual Branch Licensing Policy which requires commercial banks with 100 branches or more to open at least 20% of their branches outside big cities and set up branches in Tehsil Headquarters where no branch of any bank exists. 3. SBP has developed a world class regulatory framework to enable commercial microfinance and branchless banking in Pakistan. These regulations enable alternative approaches and models for delivery of propoor and low-income financial services and products while ensuring institutional viability, broadening access, financial integrity, and proconsumer practices.
- 5. 4. Pakistan is amongst the few countries that have a national microfinance strategy which not only identifies drivers and bottlenecks to growth but also provides an implementation plan drawn along side with industry stakeholders to monitor progress against the identified targets. 5. SBP has partnered with the UK Department for International Development (DFID) and other donors to launch programs to increase access to finance in the country. The DFID-funded Financial Inclusion Program (FIP) aims to address financial exclusion through a variety of interventions. FIP focuses on market-based, sustainable financial services for low income people and small enterprises. In addition, FIP aims to enhance delivery of financial services through technology based branchless banking solutions, financial innovation, and remittances. FIP has provided support to a number of initiatives to enhance supply of and access to finance for SMEs, agriculture, and microfinance sectors. FIP interventions largely focus on addressing market failures and industry bottlenecks, while addressing issues of fair treatment of clients and consumer protection. Here, I would like to make specific mention of some of the breakthrough FIP initiatives on promoting responsible finance in the microfinance sector:
- 6. FIP is supporting the establishment of a separate national level Credit Information Bureau for microfinance clients. Once the MF-CIB is fully functional, it would hold the credit histories of MF borrowers addressing the fundamental issues of asymmetric information on MF clients and would also handle the issue of over indebtedness among the MF borrowers. FIP is supporting Pakistan Microfinance Network (PMN) to introduce the Transparent Pricing Initiative in Pakistan. This initiative will make the prices for the microfinance market available for the first time in history. The MF clients will then be in a position to compare the various products to make the appropriate choice. Moreover, this initiative is expected to increase the level of competition among the MF providers and ultimately efficiency which would benefit the MF clients in the long-run, and FIP is also supporting strengthening consumer protection under the industry-led SMART campaign that is seeking to improve client protection mechanism in the microfinance sector.
- 7. 6. Finally, in line with the evidence (Access to Finance (A2F) Survey of 2008) that lack of financial literacy is a major constraint in advancing financial inclusion, SBP launched the first-ever Nationwide Financial Literacy Program (NFLP) in January 2012 to tackle this issue. The program intends to create awareness about basic financial concepts such as budgeting, savings, investments, debt management, financial products, branchless banking and rights and obligations of consumers etc. The pilot phase of the program has been concluded successfully by targeting about 50,000 beneficiaries in various provinces, regions and districts with emphasis on low income strata and its effectiveness is currently being evaluated. Following a third party independent assessment, the program will be scaled up to the national level in its next phase. Let me now briefly talk about the current overall architecture of financial Consumer Protection which anchors on: Comprehensive Legal and supervisory framework. Effective Institutional arrangements Robust dispute Resolution Mechanism Impactful Financial Literacy and Capability programs and initiatives. Culture of providing responsible finance by the financial service providers.
- 8. Let’s begin with Legal Framework. Ideally, there should be a Financial Consumer Protection Act at the Federal level, covering a range of issues, including transparency, confidentiality, data protection, account servicing, protection against unfair contracts, lending practices and availability of statements, etc. However, due to lack of such framework at the national level, SBP has been promoting financial consumer protection in the industry through regulatory initiatives on the basis of its powers under the BCO, 1962. These include: 1. Issuance of Prudential Regulations for Consumer Financing, which addresses a number of important issues pertaining to market conduct and consumer protection. 2. Issuance of circulars, covering key areas arising from consumer financing, including disclosure standards, business conduct, underwriting standards, complaints handling, cooling-off periods, sale of third party products, fair debt collection practices, pricing and loan documentation, etc. 3. Establishment of electronic CIB. 4. Fixation of Minimum rate of return on deposits. 5. Issuance of guidelines for Internal controls for cheque payments 6. Issuance of guidance on Sale of Third party products. 7. Issuance of operational Guidelines for Credit card Business in Pakistan. 8. Issuance of operational Guidelines on ATMs 9. Issuance of Guidelines on Collection of Utility Bills 10. Issuance of Guidance on Priority to Senior Citizen and Pension Disbursement through Banks
- 9. Welcome Address at the launching ceremony of Financial Innovation Challenge Fund 2nd Challenge Round on “Promoting Innovative Rural and Agriculture Finance in Pakistan”
- 10. Improving financial access to alleviate poverty is a global challenge. More than 2 billion adults in the world do not have access to formal or semi-formal financial services. At the same time, one billion people with mobile phones do not have even a basic bank account. As the costs of information and communications technology have now shrunk, the time is ripe for using technology to address financial exclusion. Therefore, financial inclusion is one of the key pillars of the G- 20’s development agenda. The G20 leaders at their Korea Summit in 2010 included “innovation” as one of the key principles for promoting financial inclusion. While urging the developing countries to cultivate a broad based government commitment to financial inclusion to help alleviate poverty, the G20 Principles urge them to promote technological and institutional innovation as a means to expand financial system access and usage. Since financial exclusion is particularly pronounced in Pakistan, both the Government and the State Bank of Pakistan are addressing this challenge using innovative policy approaches and actions. There is a full commitment of the government to provide sustainable financial access to the under-served economic and geographic segments including youth, women, and SMEs. In this effort, the role of multilateral institutions and bilateral donors particularly the UK’s Department for International Development (DFID) has been critical.
- 11. In Pakistan rural population is above 60% and most people living in rural areas drive their income directly or indirectly from agriculture. It employs around 45 percent of our total labor force. If we were to develop any logical linkage between the economic development of Pakistan with any of the sectors, that sector would most probably be agriculture. Agriculture plays a strategic role in ensuring food security, generating economic growth, reducing poverty & inequality. To combat poverty in rural sector, financial innovation needs to be targeted towards the productivity of the agriculture sector specifically to the productivity of “small farmers”, improvement in farmer’s education, and better availability of fertilizers, and agriculture equipments. Financial services outreach in the rural sector can play the most indispensable role in this regard. Promoting financial inclusion by developing agri credit market, rural SMEs and microfinance sector is one of the top priorities at SBP. Over the past few weeks, State Bank has taken some ground-breaking initiatives to uplift financing to the farmers and small and medium entrepreneurs:
- 12. State Bank has revamped Prudential Banks for Agricultural Financing whereby banks have been advised to formulate all-inclusive agri. finance policies and set up dedicated agri divisions within banks. Under the revised PRs, the scope of agri. financing has been widened to include value chain financing and Islamic mode of financing. We have just revised the per acre Credit Limits for crops, orchards and forestry which were previously set in 2008. This was done to meet the enhanced credit requirements of farmers and also increase the agri credit portfolio of banks manifold. Farming community and banks have been overwhelmed by this initiative. We all know the significance of livestock that accounts for 55 percent of agri. GDP. However, the share of credit to livestock is disproportionately small due to high risk perception. Therefore, to address this issue, SBP has introduced a Livestock Insurance Scheme for borrowers to mitigate risk of loss of livestock due to disease, natural calamities & accidents. To ensure diversity of agri. financing institutions, SBP has included Microfinance Banks and Islamic Banks into the agri. Indicative Target scheme of SBP. The Agricultural Credit Advisory Committee (ACAC), which is the apex consultative forum for agri financing with representation from all the relevant federal & provincial departments, farming community, banks and experts, has been re-activated.
- 13. The ACAC met on 17th February 2014 which supported my six-point agenda to boost agri financing. This includes: o Launching of the 2 nd Round of Financial Innovation Challenge Fund (FICF) under the UKAID-sponsored Financial Inclusion Program, to promote innovative techniques in agri and rural financing (for which we have gathered today). o Further, the ACAC approved my proposal of upward revision in the agri credit disbursement target from Rs. 360 billion to Rs.380 billion for the current year, which is 13 percent higher than the actual disbursement of Rs.336 billion in last year. o SBP is going to launch a country-wide Internship Program for 100 top graduates in agriculture to be funded under the ADB’s Improving Access to Financial Services Endowment Fund. o Banks have been assigned targets for outstanding agriculture portfolio and number of borrowers to have high impact of financing at grass roots level from the current year. o SBP has made agricultural finance a key indicator of performance of banks which will be reflected in their supervisory ratings. o And, finally a working group of ACAC has been formed to review the state of affairs of small farmers financing and make recommendations for improving financial access to small farmers.
- 14. Recognizing the economic significance of rural SMEs, State Bank has revised the Prudential Regulations for SME financing to put focus on ‘S’ part of SMEs. Further, following incentives for SME exporters have been introduced in the Export Finance Scheme (EFS). o Banks will allocate at least 10% of their EFS limits for SMEs. Page 5 o For SMEs availing Export Finance under the Performance-based System, the mark- up rebate has been increased by 0.5 percentage point. o Further, to incentivize banks to provide more financing to SMEs their spread has been increased from 1% to 2% for SME borrowers WITHOUT changing prevailing end user rate for exporters.