Access to Finance in NWFP

Sponsored by

The World Bank











Prepared by

Dr. Sohail J. Malik, Dr.Muhammad Khan Niazi, Ms. Hina Nazli,
Dr. Abdul Salam, Abdul Wasay and Others

Innovative Development Strategies (Pvt) Ltd.

August 2005
ii
Transmittal


Mr. Mudassir Khan
Finance Specialist
World Bank
Islamabad Office

The final report of the Study on Access to Finance in NWFP awarded to us is enclosed.
We hope that the World Bank and Government of NWFP would find this report useful.

This report highlights our views on issues and constraints and presents suggestions on the
subject. Although the study findings are tentative, given the paucity of the data available,
I believe that they are pretty robust and well grounded on consultations with banks and
non bank financial Institutions active in the NWFP, and the best practices adopted
elsewhere. Access to data for us was a serious constraint and despite our best efforts its
general lack of availability hampered our analysis. This data situation is also an indicator
of the lack of transparency in this sector which does nit augur well for its development.

I take this opportunity to thank the World Bank for assigning this study to us. I also
appreciate the cooperation of GoNWFP and its agencies for sharing data and supporting
our work in implementation of the study. I also acknowledge the support from several
close colleagues who contributed to the study in different ways.


Dr. Sohail J. Malik

iii

Table of Contents



Background ..................................................................................................................... 1
Institutional and Service Structure .................................................................................. 6
Financial Services Offered in NWFP ........................................................................... 12
Scheduled Bank ............................................................................................................ 17
Non Bank Financial Institutions (NBFIs) ..................................................................... 36
Micro-credit .................................................................................................................. 47
The Focus Group Discussions ...................................................................................... 56
Summary and Conclusions ........................................................................................... 60
Annexures ..................................................................................................................... 67


iv
Acknowledgements

The Authors would like to acknowledge a great debt to Mr Mudassir Khan, the World
Bank task manager for this study who despite his numerous other commitments devoted
considerable time to the development of some of the main findings and recommendations
contained in this study. His greatest contribution was in terms of time he devoted to
helping us access data.
.
Thanks are also due to Mr Zia Ur Rehman, the Finance Secretary to the Government of
the NWFP and his colleagues for the time they gave the study team for discussions and
for access to the Government of NWFP data. Thanks are also due to the representatives
of the Banking and non bank financial institutions who met with us and discussed various
issues affecting the development of the financial sector in Pakistan. Finally thanks are
due to the stakeholders representing different walks of life who met with us and shared
their experience and insight into the working of the financial markets in NWFP.
v
Acronyms

ABL Allied Bank Limited
ADB Asian Development Bank
ADBP Agriculture Development Bank of Pakistan
ATMs Automatic Teller Machines
BADP Barani Area Development Project
BCO Banking Companies Ordinance
BID Banking Inspection Department
BNFBs Bearer National Fund Bonds
BOK Bank of Khyber
BPRD Banking Policy & Regulation Department
BRI Bank Rakyat, Indonesia
BSD Banking Supervision Department
CBOs Community Based Organizations
CDNS Central Directorate of National Saving
CDs Certificates of Deposits
CIB Credit Information Bureau
CIF Community Investment Fund
COIs Certificates of Investment
CRR Cash Reserve Requirement
CTFS Commission for Transformation of Financial System
DAD Deposit Account Department
DASP Dir Area Support Program
DFIs Development Finance Institutions
DHs Discount Houses
DRO District Revenue Officer
DSCs Defense Savings Certificates
ECs Exchange Companies
FBC Federal Bank for Cooperatives
FECs Foreign Exchange Companies
FBs Foreign Banks
FCDs Foreign currency Deposits
FD Finance Department
FEBCs Foreign Exchange Bearer Certificates
FGDs Focus Group Discussions
FIs Financial Institutions
FMBL First Microfinance Bank Limited
FWBL First Women Bank Limited
GDP Gross Domestic Product
GoNWFP Government of NWFP
GOP Government of Pakistan
GPO General Post Office
vi
HBFC House Building Finance Corporation
HBL Habib Bank Limited
HFCs Housing Finance Companies
IBB Islamic Banking Branch
IBD Islamic Banking Division
IBP Institute of Bankers Pakistan
IBs Investment Banks
ICP Investment Corporation of Pakistan
IDBP Industrial Development Bank of Pakistan
IFSB Islamic Financial Services Board
IPS Investors Portfolio of Security
KB Khushhali Bank
LCs Letters of Credit
MRDP Malakand Rural Development Project
MBL Meezan Bank Limited
MCB Muslim Commercial Bank
MF Microfinance
MFIs Micro Finance Institutions
MOF Ministry of Finance
MRTBs Market Related Treasury Bills
MSDF Microfinance Social Development Fund
MSDP Microfinance Sector Development Program
MTBs Market Treasury Bills
NBFCs Non-bank Financial Companies
NBFIs Non-bank Financial Institutions
NBP National Bank of Pakistan
NCBs Nationalized Commercial Banks
NCCC National Credit Consultative Council
NDFC National Development Finance Corporation
NDLC National Development Leasing Corporation
NGOs Non-profit Government Organizations
NIBAF National Institute of Banking and Finance
NIM Net Interest Margin
NIT National Investment Trust
NPLs Non-performing Loans
NRSP National Rural Support Program
NSC National Saving Center
NSO National Saving Organization
NSS National Saving Schemes
OMOs Open Market Operations
PACRA Pakistan Credit Rating Agency
PBA Pakistan Banks Association
PBC Pakistan Banking Council
PC Privatization Commission
vii
PCBL Prudential Commercial Bank Limited
PDs Primary Dealers
PIBs Pakistan Investment Bonds
PICIC Pakistan Industrial Credit and Investment Corporation
PICICCB PICIC Commercial Bank
PMN Pakistan Microfinance Netwros
POs Post Offices
PPAF Pakistan Poverty Alleviation Fund
PR Prudential Regulation
PSCBs Public Sector Commercial Banks
PTCs Participation Terms Certificates
RDFC Regional Development Finance Corporation
RDNS Regional Directorate of National Saving
RFCD Resident Foreign Currency Deposits
RICs Regular Income Certificates
RSPs Rural Support Programs
SBFC Small Business Finance Corporation
SBP State Bank of Pakistan
SBP (BSC) State Bank of Pakistan (Banking Services Corporation)
SECP Securities and Exchange Commission of Pakistan
SLIC State Life Insurance Company/Corporation
SLR Statutory Liquidity Requirement/Ratio
SME Small and Medium Enterprises
SRSP Sarhad Rural Support Program
SSCs Special Saving Certificates
UBL United Bank Limited
VCCs Venture Capital Companies
ZTBL Zarai Taraqiati Bank Ltd



1
Chapter 1
Access to Finance in NWFP

Background

Economic Growth, Poverty Reduction and Access to Finance

Greater depth and soundness in financial sector contributes to broad-based economic
growth, which is the basic driver of poverty reduction. Efficient financial markets
promote investment and productivity growth through their role in project selection, risk
diversification, reducing asymmetries of information, improving resource allocation, and
optimization of scale, time frame and technology. Strong financial systems help absorb
shocks while shallow domestic financial markets have magnified international financial
market turbulence, adversely impacting the poor. Weak financial systems and resulting
financial crises entail huge fiscal costs that crowd out social and poverty related public
expenditures. These fiscal costs impact the poor disproportionately if they are financed
by inflation. Moreover, badly managed financial crises cause severe disruption to
economic processes, erode capital stock, erase confidence in the banking sector, and set
back poverty reduction efforts for long periods.

Improved access to financial services should help both consumers and producers to raise
their welfare and productivity. Individuals can insure themselves against periods of low
income or unexpected income fluctuations, and maintain their consumption standards
through the accumulation of financial savings. For example, for a farmer, his savings
provide some insurance to protect him against drought or crop failure. Savings also cater
for future expenditure needs, whether expected (for example, for special family occasions
like a marriage, or for purchase of significant assets such as a home) or unexpected
events. The access to savings and borrowing opportunities could also have longer term
welfare implications, permitting people to borrow when young (for example, for
education) and repay and save for retirement when they are older and employed.

For a producer, access to credit for fixed or working capital enables an increase in
production possibilities which can have far reaching implications not only for the
producer but for patterns of employment, occupational choice and even economy-wide
productivity and growth. Financing constraints have been shown to feature prominently
among the constraints of small and medium-size enterprises in some investigations.
Some studies claim the difficulty of access to financial markets to be the major obstacle
to the expansion of their business activities, ahead of other factors such as macro
instability, taxes, and street crime. Furthermore, the access to financial services for
smaller enterprises directly impacts poverty due to a relatively higher employment
potential of such enterprises.
2

But expansion of supply of financial services to underserved segments of society can also
pose particular difficulties for financial intermediaries such as banks. Limited provision
of financial services cannot be simply interpreted as an unwillingness to provide such
services. Lending to some segments, especially the very poor, may be very risky, as there
may be a real difficulty in repaying, or temptation to not repay, with households at the
margins of financial and cash flow resources. Persons with informal or irregular
employment may face real difficulties servicing loans. The possibility of such problems
imply that it is important for financial intermediaries to get information on their
prospective clients, to assess their creditworthiness, but such information may be difficult
to obtain reliably and costly to collect. Such difficulties can imply that even potentially
good clients are underserved, and sometimes, entire communities may face limits on
credit which cannot be increased in volume even by raising interest rates. Additionally,
there are costs associated with the provision of financial services, and if the value of the
services provided is small, or services are to be provided in sparsely populated regions, it
may be difficult to cover such costs. Costs of administration may be high due to the need
for intensive interaction with and low education of clients. Maintaining accounts may be
costly as poor persons deposits (which can provide interest incomes to banks) may be
low, while transactions needs (which are costly to provide) may be high. Such issues
arise in all countries, but there may be country specific factors, for example regulatory
requirements, which could impact on costs associated with the provision of specific
financial services.

Purpose and Scope of Study

The study aims to identify ways of expanding access to finance in NWFP while
acknowledging the specific factors limiting the expansion of financial services to
individuals and enterprises of various sizes in rural and urban areas and to suggest
measures to mitigate their impact. The study reviews the operation of financial markets in
NWFP and attempts to assess the extent to which constraints to access operate, and to
identify the nature of these constraints, at the level of different types of financial
institutions and indifferent segments of financial markets. The study then seeks to
identify alternative strategies for improved access based on international best practices.
Finally, the study discusses public and private choices which could enhance the
availability or reduce the cost of provision of such services, consistent with sound
financial practices.

Measures of access and actions to expand access can vary depending on which groups of
the underserved are being referred to. Financial exclusion - the inability to access
necessary financial services in an appropriate form - can result from difficulties relating
to conditions, prices, or marketing of financial services, or from self-exclusion, often in
response to religious and cultural perceptions. The underserved groups may be defined in
several ways. Poorer segments of society usually have disproportionately low access and
the poor can be defined in terms of income or wealth/assets. Access may be poor in some
3
sectors of public interest, i.e. agriculture, construction and mining in NWFP. Some
geographic regions may have lower access, which may combine characteristics such as
remoteness or sparseness of population with economic backwardness. Specific
communities of persons or racial groups may be identified to be disadvantaged in terms of
financial access. Additionally, the criterion of small size is often applied, particularly to
producers, so that micro or small scale entrepreneurs are often identified to face special
difficulties in accessing financial services, especially credit. Sometimes, more than one
such characteristic may apply to a particular underserved segment of the population.

Latest data are unfortunately not available. However, based on the key informants
surveys carried out by this team, it is found that several different financial institutions
(FIs) supply financial services in NWFP. These include scheduled commercial banks,
specialized banks, government organization, insurance companies, and other non-bank
financial institutions (NBFIs). These FIs offer a variety of services but the study focus is
on saving (deposits taking, investment and collecting premium), lending, bill
collection/discounting, and remittance services. FIs use a variety of financial instruments
based on their niche and for serving specific market segments. The study analyses the
past four years data on the financial services provided by FIs, their outreach and client
characteristics, etc., with a view to assess the existence, density, depth and gaps and
constraints on financial services provided in different market segments in NWFP. Given
the predominance of the banking sector, the study examines its services in greater detail,
particularly their accessibility to the relatively poor, agriculture sector, SMEs, etc. and
investigates the potential for expansion of services to these underserved segments and
sectors. NBFIs serve special development mandates for otherwise special and
underserved market segments such as SMEs, housing, etc., through their niche-specified
instruments.

Demand side perspective on financial services is crucial for a proper assessment of
availability, their usefulness and areas needing policy attention. The study obtains this
perspective through consultations with select groups of prospective consumers of
financial services in focused group discussions (FGDs). Particular attention is given to an
evaluation of financial sector reforms in the past many years with respect to their impact
on access. All these research explorations aim to address the basic questions as to what
factors can be associated with the provision of services and what policy measures can be
taken to improve the access, particularly for the relatively underserved sections.

The study attaches special importance to microfinance (MF), since MF serves the needs
of the poorest of the poor, the most underserved people and enterprises at the bottom rung
of incomes, and attempts to push the poor out of poverty and make them bankable. A
range of MF institutions including NGOs operate in NWFP, but in line with global
experience, their share in total financial services is very small. The MF issues and tools
are quite different; lending is through community organizations on high mark up rates;
and needs a lot of information and skills for effective credit supervision, etc. MF is quite
risky and labor intensive also, being a facility for the poor who have low capacity to pay
4
and requires special supervision skills; hence it is very costly compared with
conventional lending services. Providing for these constraints is not an easy task. While
accepting the significant role of these factors, the present study focuses on
microeconomic issues affecting the distribution of credit services, and explores the
possibility for a more proactive microeconomic role for the public policy with regard to
financial access.

Possible Measures of Access

Conceptually, a series of alternative indicators may be devised to measure or monitor
access and track the results of policy initiatives. Simpler measures can be constructed
based on easily available statistics, but these measures have limitations in their
interpretation. More sophisticated indices of access require the collection of specialized
data which makes them difficult to construct or to use for comparative purposes. Some
alternative approaches are discussed below.

A simple group of indicators of access is institutional presence, i.e., the supply of
financial institutions or service points for the delivery of financial services. This could
refer to a count of different types of financial institutions (banks, NBFIs, MFIs, etc.), or
number of branches, service posts, ATMs, etc., of such institutions. Listings of such
institutions are usually available. Availability of such statistics at the geographic level
can provide indicators of service availability by region or area. Limitation of these
measures is that in their simplest form they do not indicate the extent to which these
service outlets meet the demand for financial services. Some modifications can be
introduced by presenting the indicators as ratios, e.g., bank branches per unit of
population, or population per unit. Another limitation is that all institutions do not
provide the same levels of service; some may be larger and more comprehensive in terms
of service provision. With changing technology, institutional presence may become less
important for the delivery of financial services, which can be undertaken remotely
through the phone or web, without the need for physical presence.

Another group of measures is the volumes of deposits, credits, assets or net worth of
financial institutions in specific areas. These measures alone also have limited usefulness;
the operational level of a financial institution in a given area gives no indication of which
types of clients it serves. For example, even in a relatively poor area of the country, a
bank may choose to focus its services on the richer segments of the population.

More detailed supply side indicators of access attempt to look at volumes of services
provided to particular client categories. Different types of financial services can be
examined; deposits, credit as well as other transactions such as payments and money
transmissions, the provision of card facilities, etc. If the target groups of underserved
persons (low income/poor clients) could be identified directly, such indicators would be
very valuable. However, it may be difficult for FIs to have reasonable information on
client incomes. Often the size of financial transactions is used as a proxy, i.e. small
5
deposits or small loans, but this can clearly misrepresent client income. These indicators
can more easily be applied to identify services provided to disadvantaged communities
with specific socio-economic characteristics, such as sector, gender, etc.

Measures of the extent to which the demand for financial services is met are more
difficult to construct than the supply side indicators. The unfulfilled demand is not only
conditional on a specific service price, but it also depends on other conditions of service
(such as distance, convenience, etc.,) as well as on the risk characteristics of the
individual or enterprise; hence it is difficult to measure. Broad proxies of credit needs for
enterprises, especially working capital credit needs, can however be constructed, based
on turnover, raw material needs and other data. The credit needs for fixed capital, being
ad hoc, are difficult to proxy. Individual credit needs, or the needs of micro-enterprises
which do not separate personal and business needs are harder to assess. Measuring
demand for savings or deposits or other financial services also poses similar difficulties.
Since survey/census based indicators of individuals, households or enterprises are more
demanding in terms of time and resource, the assessment of financial constraints is
typically based partly on client group perceptions and related information such as refusals
to provide services.

Some broad-based measures of access could also be constructed based on the pricing of
financial services. Critical variables in this context are the interest rates or the
commissions charged. While interest rate levels would clearly affect overall volumes of
access and hence financial depth, the rate structures can focus more specifically on access
issues. A broad measure in this regard is the average spread between borrowing and
lending rates. Disaggregation of spreads and examinations of the composition of spreads
can also lead to the monitoring of trends in subcomponents of spreads. Concerns about
access could also be more specifically tracked by looking at the interest rate structure in
greater detail; for example, prices of consumer credit, housing loans, rural/agricultural
credit; and also by examining the degree to which price discrimination may operate
across different segments, and assessing the presence or absence of market segmentation.

The present study bases its analyses on institutional presence by branches, availability of
the four key services/measures the access, deposits, lending, remittance and bill
collection/discounting, further analysis of FIs outreach, client characteristics, etc. The
supply side information on institutions and services is buttressed by client perceptions
through FGDs with select groups of clients in strategically selected districts. These
choices are dictated by data paucity although the study makes use of international best
practice where possible.
6
Chapter 2
Overview of Financial Sector of Pakistan
Institutional and Service Structure

A variety of financial institutions provide financial services in Pakistan, including banks,
NBFIs, insurance companies and CDNS. These institutions can broadly be categorized in
three major groups: banks including development banks and DFIs under the supervision
of SBP; the institutions regulated by SECP including leasing companies, modarbas,
mutual funds, housing finance companies, venture capital, and discount houses, and
insurance companies; and CDNS and
POs directly controlled by the federal
government. These institutions are
listed in Annexure ? and summarized
in Table 2.1. .

The financial institutions provide a
variety of services. Commercial banks
are more wholesome institutions
providing almost all financial services
of taking deposits, lending, bill
discounting, remittances, etc. The
exception is only specialized banks
which primarily focus on the financing
needs of agriculture and industry.
Hence commercial banks dominate the
sector in terms of volumes of business.
Micro finance banks (MFBs) have tiny
operation in terms of total lending.
Some leasing companies and NGOs
are also active in extending micro
finance. The lines of division of
business among FIs are fading
overtime. DFIS, investment banks,
leasing companies and modarbas
provide deposit and lending services
like banks, although their operating
ratios may be quite different. For
example DFIs would rely more on
equity and CDs and lend more for
plants and machinery, and so on.
Almost all NBFIs have or had their
Table 2.1. : Financial Institutions Operating in Pakistan
As on 31st December 2003
Category Number
Scheduled Banks
Commercial Banks
Public sector 5
Private sector
Domestic 18
Foreign 14
Specialized banks 3
Micro Finance Banks 2
NBFIs
Development Finance Institutions 7
Investment Banks 14
Leasing Companies 25
Modarabas 40
Housing Finance Companies 4
Mutual Funds 37
Discount Houses 4
Venture Capital Companies 4
Insurance Companies
Non-life insurance
Private sector
Domestic 45
Foreign 3
State Owned 1
Life Insurance
Private sector
Domestic 2
Foreign 2
State Owned 1
Reinsurance 1
State Owned
Central Department of National Saving 1
PostOffice 1
Source: SBP financial Sector assessment 2003

7
niche which is trespassed by others under the forces of innovation, competition,
technology and statutory changes. Insurance industry manages and indemnifies financial
risks and serves as a major institutional investor for capital and money market. Post
offices and exchange companies mostly deal in money transfer services. Bills are mostly
handled by banks although some Post Offices also collect utility bills. CDNS, in
cooperation with banks and Post Offices, mobilizes public saving for the budgetary
support. The service profile of leading FIs is summarized in Table 2.2.

Table 2.2 A Summary of Financial Services Available in Pakistan
Banks
NBFIS
Insuran
ce
Governmental
NG
Os
Exchan
ge
compa
nies
Leasin
g
Modara
bas
Mutual
Funds
Housin
g
Financ
e CDNS
Post
offices
Deposits
Current X X X X
Saving X X X
Term X
Investments X
Lending
Industrial X X X
SME X X X
Trading X X X
Running Finance X
Consumer Finance X X
Microfinance X X
Letter of Credit X
Credit Cards X
ATMs X
Discounting X X
Remittances X X X
Underwriting X X
Housing Finance X X X
Islamic Financing X X
Bill Handling X X

The financial sector has recorded robust growth in recent years under the influence of
growth revival and financial sector reforms. Overall assets of the financial sector rose to
Rs 4.1 trillion in June 2003 from Rs 3.1 trillion in June 2001, showing an average annual
growth rate of 15 percent. The size of the financial sector at this level constitutes 84.7
percent of GDP (at current market prices) in 2003 compared to 75.2 percent in 2001. The
vibrant growth was largely in banks, mutual funds and insurance sub-sectors. Banks
domination of the sector has thus been rising in recent years while the asset share of
NBFIs has been falling. This structural change is largely is due to mergers/acquisitions of
the NBFIs with commercial banks and banks expanding business activities in areas where
8
the NBFIs were strong (e.g. auto/lease finance). The asset share of CDNS, which
mobilizes funds for direct budgetary support, is also likely to decrease as the impact of
financial reforms (profit rate rationalization on NSSs) grinds through fully. In 2003,
banks accounted for 62.4 percent of total sector assets, while CDNS, insurance
companies and NBFIs accounted for 24.1 percent, 7.3 percent and 6.3 percent,
respectively (see Table 2.2).

The NBFIs share of assets, which had been
declining until 2002, has increased in more
recent years. The institution-wise break-up of
NBFIs indicates that major contributors to this
increase were DFIs and Mutual Funds. The
assets of DFIs saw an impressive growth of
15.3 percent during FY03 on account of
increasing business activities in general and
investment activities in particular. During the
same period, mutual funds almost doubled to
Rs 56.2 billion primarily due to the boom in
the equity market and capital gains on
government securities.

Asset structure: Financial institutions mostly
lend, invest or keep their resource in the form
of cash, and in 2003, these asset heads
accounted for 50.4 percent, 31.5 percent and
12.0 percent of the total sector assets,
respectively [see Table 2.3]. However the asset composition has been changing due to
changes in the ownership structure, fall in spreads, shifts in corporate investment demand
with falling interest rates and refocus of financial institutions towards non-traditional
areas like consumer finance, SMEs and micro-finance and agri-credit. Thus in recent
years, advances and cash holding as percent of total sector assets have shown trends
while the share of investments has risen
sharply. DFIs have the largest share among
NBFIs in overall advances and investments,
followed by Mutual Funds and Leasing
Companies in 2003.

Financial Credit

Private sectors access to credit has been
growing very fast during the last few years
due to favorable demand and supply
conditions in the credit market. With ample
liquidity in financial system, interest rates
Table 2.3: Asset Structure of the Financial Sector
2000 2001 2002 2003
Assets
(billion
Rupees) 2,970.6 3,129.2 3,539.1 4,081.8
Asset Shares of Major I nstitutions
Banks 60.9 62.1 62.8 62.4
NBFIs 8.1 6.5 6.0 6.3
Insurance 7.0 7.1 7.2 7.3
CDNS 24.1 24.3 23.9 24.1
Financial
Sector 100.0 100.0 100.0 100.0
Growth Rates
Banks 7.4 14.5 14.5
NBFIs -15.7 5.6 20.2
Insurance 7.2 14.7 16.0
CDNS 6.5 11.1 16.0
Financial
Sector 5.3 13.1 15.3
Assets as percent of GDP (at market prices)
Banks 47.7 46.7 50.5 52.8
NBFIs 6.3 4.9 4.9 5.3
Insurance 5.5 5.4 5.8 6.2
CDNS 18.8 18.3 19.2 20.4
Overall 78.3 75.2 80.4 84.7
Source: SBP (2003)
Table 2.4: Distribution of Scheduled Banks Credit (billion Rs)
As on
Change During
FY04
Jun-03 Jun-04

Absolute Percent
Fixed investment 241.8 354.5 112.7 46.6
Corporate sector 220.8 313.7 92.9 42.1
SMEs 21 40.8 19.8 94.1
Working Capital 265.7 403.5 137.8 51.8
Corporate sector 190.9 247.9 57 29.9
SMEs 74.9 155.6 80.7 107.8
Trade Finance 162.3 218 55.7 34.3
Corporate sector 112.7 163.8 51.1 45.3
SMEs 49.6 54.2 4.6 9.3
Agriculture
1
202.2 198.7 -3.5 -1.7
Consumer credit
2
45.1 142.3 97.2 215.4
Others 125 33.9 -91.1 -72.9
Total 1,042.2 1,350.9 308.7 29.6
Source: SBP (2003)
1 Includes commodity loans
2 Includes staff loans

9
have touched the historical low levels while there has been a surge in the overall
economic activities. Besides SBP has identified several new sectors and provided
requisite guidelines for bank financing to give boost to the economy while maintaining
prudential norms. Overall credit extended by the scheduled banks increased to Rs 1,350.9
billion at the end of FY-2004 compared with Rs 1,042 billion at the end of FY-2003. In
end-FY-2003, the share of corporate sector accounted for 53.7 percent of total credit,
SMEs share accounted 18.6 percent, consumer finance 7.6 percent, and agricultural
credit accounted 8.0 percent.

Disbursement of agricultural credit has registered a remarkable improvement in recent
years with enhanced role of commercial banks and PPCBL in agri financing. However
the share of agri credit, a part of which may be treated as working capital finance,
declined during FY04 (see Table 2.4).

Consumer finance has grown sharply in the last few years, with the largest share going in
personal loans which include financing for consumer durables. The availability of auto
loans has been the driving force behind the strong growth of the automobile industry.
Housing finance has although stagnated despite the stated policy priority. Lending
institutions have been unable to match the tenor of housing finance with tenor of their
liabilities due to the lack of appropriate staff skills, experience in consumer credit
analysis, and capacity to take risk. Well-managed consumerism is healthy and banks need
to create capacity for prudent risk management with respect to consumer loans.

The SME lending has shown a tremendous growth for both fixed investment and working
capital in recent years. Outstanding credit to SMEs has increased from Rs 145.5 billion in
June 2003 to Rs 250.6 billion in June 2004. SBP has been closely monitoring the growing
volume of SME finance and its associated risks, and issued separate prudential
regulations for SME finance.

Micro finance is also gaining weight as an effective tool of social mobilization and
poverty alleviation through market-oriented self-employment and income generation
schemes. A variety of institutions are providing micro finance services, ranging from
NGOs, to banks, leasing companies, and private and government sponsored rural support
programs. Presently two specialized MFBs are operating in the country. Two commercial
banks also provide special lines of credit for the micro finance sector. MFBs have been
expanding very fast their branch network and lending operations; MFBs advances
increased by 49.3 percent during CY03. One-third of the total MFB clients are females,
livestock sector has the major share in micro loans followed by micro enterprises and agri
inputs.

Islamic modes of financing are being introduced, in line with global trends. By end-June
2004, an Islamic bank and 13 stand-alone branches in five banks had started Islamic
finance operations. These banks are using a wide range of products for financing,
including corporate ijarah, consumer ijarah, trade/project financing, export and import
10
morabaha financing etc. The assets of these Islamic banks/branches almost doubled, from
Rs 33 billion in FY01 to Rs 68.4 billion during FY03.

Financial Savings

People avail saving services from several sources. The biggest source is deposits at Banks
which rose by 19 percent to 1,687 billion during FY-2003. The share of deposits in
financial institutions (mostly scheduled banks) has maintained an increasing trend in
recent years due to the recent revival of economic growth, increased workers remittances
and massive expansion of some credit lines. With equity roughly remaining around the
statutory levels, the availability of cheaper funds in the form of deposits explains the
declining share of borrowing, which is considered a relatively expensive source. Thus in
2003, the respective shares of bank liabilities were: deposits 78.6 percent, borrowing 14.3
percent and owners interest 7.1 percent. NBFIs share of deposits is very small (about
1.5 percent in FY-2003). Many people keep their savings in NSSs at CDNS; NSS
accounted for about Rs 1 trillion or about 30 percent of financial saving in FY-2003. The
share of CDNS is likely to decrease in coming years as the rate reduction on NSS grinds
through. A significant share of financial savings is kept in the form of hard currency; this
share averaged 14.7 percent in FY-2000-03.

Ownership control of the financial sector has witnessed a radical change. The share of
asset held by the private financial institutions have been rising persistently over the last
many years. This change has been brought about by privatization of public sector
financial institutions, mergers and acquisition of a number of foreign banks with private
sector commercial banks, aggressive business activities of the private banks and surge in
activities of existing NBFIs largely on account of the boom in equity markets. Excluding
CDNS, the private sector banks jointly with the foreign banks holds around 70 percent of
total assets of the sector.

Some improvement has been observed in the asset structure of insurance industry
although it is still heavily skewed towards state owned insurance companies, in both non-
life and life insurance sectors. The share of State Life Insurance Corporation (SLIC) was
70.5 percent in CY03 but declining. Similarly in non-life insurance, National Insurance
Company (NICL) occupied about 10 percent share in CY03. In addition, the country also
has one reinsurance company for non-life insurance companies in the public sector.

Payment systemremains in a transition. Automated and electronic means of financial
transactions are gradually replacing the paper-based system, and the use of credit, debit
and ATM cards is growing rapidly. However, the value of transactions routed through
ATMs is still very small. The Central Depository System (CDS) has made significant
inroads in the trading and settlement of equities listed in the three stock exchanges of the
country.

11
In sum, the financial sector appears to have registered a marked improvement in its
performance in recent years. Reportedly, the financial system is better equipped to cater
to the credit needs of growing economy, and its resilience to both internal and external
shocks has increased. Intermediation costs measured in terms of spreads have come
down, due to increasing competition among financial institutions, low inflation rate and
limited scope for further cuts on deposits rates, which have plummeted to abysmally low
levels. Despite the squeezed margins, the sector profitability has risen; the recorded
return on average assets (after tax) was 1.4 percent in FY-2003 compared with the
generally accepted benchmark of 1.25 percent and negative rates a couple of years ago.
The rise in profitability is being attributed to the increased business activities of the
financial sector as is evident from the substantial rise in credit expansion and
investments. Besides the sector has been realizing huge amounts from off-balance sheet
sources of income, fee, commission, etc., massive capital gains on fixed income
government securities and increased trading in equity stocks. Finally the liquidity
position of the financial sector has remained comfortable.

The improvements have partly been brought about by revamping of regulatory and
supervisory practices. Prudential Regulations have revamped and comprehensive
guidelines provided to the banking sector, covering a wide range of commercial banking
operations, agriclutral lending, consumer, SME and micro finance. Various changes have
been introduced in the banking supervisory mechanism to ensure proactive monitoring of
the risks and a minimum level of prudence. CIB has started maintaining credit history of
individuals to avoid over-leveraging by taking several loans from various banks and it
has been made mandatory for all banks engaged in consumer finance to become a
member of a CIB. Except for DFIs, the regulation for NBFIs has been assigned to SECP
which has implemented prudent corporate practices in parallel.

The financial sector is however faced with some real credit and market risks. With easy
availability of funds, the sector has explored relatively new areas for increasing their
asset base. However the sector lacks sufficient expertise to deal with these newly
explored areas, which may undermine the asset quality. A substantial holding of fixed
income government securities by the banks and NBFIs is also a source of concern, as an
upward movement in interest rates can lead to capital losses. Similarly, investments in
stock market shares by banks may be another potential source of losses and a trend
reversal in the equity market can lead to erosion in their capital base.
12
Chapter 3
Financial Services Offered in NWFP

Data on the financial sector in the NWFP is extremely scanty. However, some
provincially representative household survey data are available on household financial
assets and liabilities, and loans that can help in forming some idea of the relative
dimensions vis a vis the rest of the country. Table 3.1 below provides information on
these variables for NWFP and Pakistan as a whole using the data from the HIES 2001/02.
Only 1.5 million households responded about their savings in bank all over Pakistan1. Of
these, 22 percent belong to NWFP. Information on loans is provided by 7.7 million
households.

Only 13,000 households responded about the money received from any group insurance.
Most of these households belong to Punjab (67%) followed by NWFP (22%) and Sindh
(11%). There was no reported money received from Insurance in Balochistan.

Table 3.1: Financial Assets/Loans Reported by Households in NWFP and Pakistan 2001/02 (%)
NWFP Total
1. Proportion of households (%)
Households with savings 22.06
100
(1,519)
Households currently have loans 18.32
100
(7,720)
Households who repaid loan last year 24.92
100
(1,400)
Household who received group insurance 22.28
100
(13)
2. Proportion of amount (%)
Total savings 17.45
100
(111,980)
Profit earned on these savings 14.88
100
(2,893)
Current loans 8.72
100
(758,926)
Amount of loan repaid 19.05
100
(24,157)
Amount of interest paid 9.26
100
(1,243)
Amount received through insurance 5.80
100
(1,501)
Source: HIES (2001-02)
Notes: Figures in parenthesis are actual numbers in thousands. Parentheses against line heading 1 indicate 000
households and against line heading 2 indicate million rupees.



1 These are only 8 percent of total households.
13

Table 3.2 Households with Savings and Loans as percent of Total Households in NWFP and Pakistan (%)
NWFP Total
Households with savings 15.70 14.01
Households who earned profit on savings 1.08 0.99
Households with current loans 66.25 71.22
Households who repaid loan 16.34 12.91
Household who paid interest on loans 0.50 0.75
Households who received insurance 0.13 0.12
Total households (000) 2,298 18,134
Source: HIES (2001/02)

According to the HIES 2001/02, in NWFP, 335 thousand households reported a total
savings of Rs. 19,536 million. This means average saving per saving household per year
was Rs 58,294. Households earned a reported profit of Rs. 430 million on this amount.
The number of current loans was 1,415 thousand, amounting to Rs. 66,192 million in this
province. Households paid Rs 115 million as interest charges on loans during 2001/02 in
NWFP.

Nearly 1.4 millions households repaid loans in Pakistan during this year. Among these,
25 percent were from NWFP.

The total amount reportedly received through payments from general insurance was only
Rs 1.5 million for the country as a whole out of which the share of NWFP was 6 percent.
As expected, non-poor households save much larger amounts than the poor households
and therefore the amount of profit received is higher for non-poor. Poor households are
found to be under heavier burden of loans as compared to the non-poor. They however,
repaid a much lesser amount than the non-poor. Differences between the poor and non-
poor in the amount received through insurance were not found to be very significant.
Household expenditure was cited as the main purpose of obtaining loans by most of the
households irrespective of their poverty status and place of residence.

Table 3.3: Percentage Distribution of Savings/Loans by Poverty Status
Poor Non-poor Both
Total savings 11.19 88.81 100.00
Profit earned on these savings 5.36 94.64 100.00
Current loans 73.07 26.93 100.00
Amount of loan repaid 22.57 77.43 100.00
Amount of interest paid 6.91 93.09 100.00
Amount received through insurance 46.85 53.15 100.00
Source: HIES (2001/02)





14

Table 3.4 Percentage Distribution of Households with Savings/Loans by Poverty Status in NWFP and
Pakistan
NWFP All Pakistan
Poor Non-poor Poor Non-poor
Households with savings 11.07 19.32 8.39 18.37
Households who earned profit on savings 0.55 1.49 0.29 1.53
Households with current loans 72.55 61.32 79.12 65.09
Households who repaid loan 15.38 17.09 11.73 13.83
Household who paid interest on loans 0.46 0.54 0.41 1.02
Households who received insurance 0.00 0.24 0.07 0.15
Households with savings/loans 91.64 93.94 64.71 56.44
Total households (000) 1,023 1,275 7,316 10,818
Source: HIES (2001/02)

According to interviews with informed persons, the financial sector appears to have been
growing very fast in NWFP in recent years. FIs are expanding their institutional presence
and diversifying their products and services with improved technology, and banking and
regulatory practices. Reportedly, there is a considerable improvement in the sector size,
diversity, its soundness, both on account of the on-going reforms and the increased
economic activities.

Several kinds of financial institutions supply financial services in NWFP. These include
scheduled commercial banks, specialized banks, government organizations, insurance
companies, and other non-bank financial institutions . The scheduled banks dominate the
financial sector in line with global trends. These banks offer a variety of financial
services, they collect accept deposits through current, saving, fixed-term and CDs, and
PLS accounts, lend money for investments, SMEs, trading, consumer finance, etc.,
discount bills, make remittances, underwrite, etc. Banks have been expanding their
outreach very fast in NWFP in recent years. The federal government is next largest
operator in the sector. The CDNS and post offices (POs) take deposits and collect
insurance premiums for using the proceeds for the budgetary support. Reportedly, the
share of funds mobilized through these schemes is falling since the rates of return on
national saving schemes have been slashed significantly. The share of PO is small in
terms of saving mobilized but the PO has a very large outreach. Several NBFIs are
attempting to expand their operations in NWFP. NBFIs design financial instruments
based on their niche for serving specific segments of the financial market. The main
actors are insurance companies, a couple of leasing companies, modarbas, mutual funds,
and housing finance companies. These operations of these NBFIs are growing very fast
over a small base; hence despite a rapid growth, the total share of NBFIs in the financial
sector in NWFP appears very small.

Overall, the province appears to be underserved in terms of financial access. The cited
reasons for this low access are the relatively low socio-economic development, existence
of a large underground economy, poor law and order situation, and religious and cultural
15
values. Instability and misuse of industrial policy in the past has led to numerous
industrial failures and non-performing loans. Particularly, the Gadoon industrial estate
debacle has given a jolt to industrial and banking sectors in NWFP. FIs are hesitant to
expand their branches in remote rural areas because of relatively low demand and the law
and order situation. People also tend to keep their money with themselves rather than in
low-yield deposits at banks. Except for BOK, the headquarters of FIs are located outside
NWFP, mostly in Karachi. FIs provide saving/deposit services in NWFP and transfer
most of the saving, so mobilized, to their headquarters for lending/investment elsewhere.
Creation of BOK, a provincial bank, was justified on these grounds. Since industry and
corporate sector is small, lending is mainly for SMEs, agricultural, and
commercial/trading activities. More recently, lending for consumer finance, mostly in
urban areas, has increased significantly.
16
Chart 3.1 Share of NWFPs Financial Sector in Gross Provincial Product and Services Sector of the
Province

3.6
3.0
3.4
3.1
2.9
6.1
5.0
5.6
5.2
4.8
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004
Years
P
e
r
c
e
n
t

s
h
a
r
e
Share in GPP Share in services sector

Source: GPP-NWFP (2005).



According to the Labour Force Survey (2001/02), Pakistans financial sector absorbs 282
thousand persons. Of these, 90 percent were concentrated in Punjab and Sindh, and only
8.5 percent were in NWFP. The employment in the financial sector of the NWFP
accounts for less than 1 percent of the labour force of NWFP.

FIs are expanding their presence in NWFP under the influence of improved economic
prospects, increased demand for consumer durables, stock market prospects, increased
competition and turnaround in the financial sector, and better technology and regulatory
practices. According to the stated policy, the SBP plans to close/merge the banks at the
smaller end. Hence banks are scrambling for early presence in uncovered places, issuing
new instruments and trying to exploit their niche. One such area which is expanding is
the Islamic banking; banks have devised Islamic instruments both on the saving and
lending sides and some banks have dedicated branches for Islamic banking. Similarly,
leasing companies, modarbas, mutual funds and other NBFIs are vying to expand their
outreach.



17
Chapter 4
Scheduled Bank

Scheduled banks dominate the financial sector in NWFP in terms of their presence and
size of operations like deposits and advances. According to an estimate, 2,847 bank
branches were operating in NWFP at the end of 2003, representing 12.2 percent of the
total branches in Pakistan. The NWFP is 9.4 percent of the total land area and 13.4
percent of the total population of Pakistan. Density of branches per million persons is
almost equal to the national level, an average of 48 branches in NWFP against 50 braches
for Pakistan. More specifically, the NWFP has less branch density than Punjab but more
than Sindh and Balochistan. Area-wise, the branch density is much better than the
national average, 11 branches per thousand square kilometer relative to an average of 8
for Pakistan (see Table 4.1). This conspicuous difference is mainly due to very low
branch density in Balochistan.

Of the total of 46 scheduled banks operating in Pakistan, 23 banks have institutional
presence in NWFP including the two specialized banks. All major banks of Pakistan have
branch operations in the NWFP. NBP ranks highest in terms of number of branches,
followed by HBL, UBL, ABL, MCB, ZTBL and BOK. The major bank branches
constitute 95.3 percent of the total branches in NWFP. NBP has 10 percent of its
branches in NWFP; ABL 14 percent; and HBL has 13 percent. The FWB, a women bank,
has 4 branches in NWFP out of the total of 39 branches. The Bank of Khyber is the
provincial bank of NWFP and has 24 branches operating in NWFP out of the total of 30
braches. The IDB and PICICCB primarily focus on industrial development finance, and
have 10 and 6 percent of their branches located in NWFP, respectively. Presence of
foreign banks is very small in NWFP; presently there is only one foreign bank branch, i.e.
of Standard Chartered Bank (see Table 4.2).

Bank branches are mostly located in the urban areas; the estimated proportion of urban
branches is 64 percent. The rest are in semi-urban rural areas. Of the urban branches,
more than two-third are located at the district headquarters. In six districts all bank
braches are urban and located at district headquarters. In Peshawar district, 97 percent of
the urban branches are in Peshawar city. The access among districts is also extremely
unequal; while 19% of total bank branches are located in the Peshawar district, the 12
less developed districts in south and north, i.e. Batagram, Kohistan, Shangla, Upper Dir,
Chitral, Malakand and Lower Dir in the north and Bannu, Lakki Marwat, Hangu, Tank
and Karak in the south, account for only 18% of bank branches (see Table 4.3).

With privatization of four large banks, HBL, UBL, MCB and ABL, the share of private
bank business has risen to about three quarters of all banks. Hence the competition

2 SBP, Financial Sector Assessment 2003.
18
Table 4.1: Dispersion of Scheduled Banks
Density
Branches Area Population Branches Branches nks
per per million Persons
(#) Sq km ('000)
1000 sq
km persons per sq km
Punjab 3,821 205,345 73,621 18.6 52 359
Sindh 1,424 140,914 30,440 10.1 47 216
Balochistan 267 347,190 6,566 0.8 41 19
NWFP 847 74,521 17,744 11.4 48 238
Peshawar 160 1,257 2,027 127.3 79 1,612
Swat 72 5,337 1,258 13.5 57 236
Mardan 70 1,632 1,460 42.9 48 895
Abbotabad 68 1,967 881 34.6 77 448
Kohat 67 2,545 563 111.0 119 221
Mansehra 61 4,579 1,153 13.3 53 252
Swabi 45 1,543 1,027 29.2 44 665
Haripur 39 1,725 692 22.6 56 401
Nowshera 34 1,748 874 19.5 39 500
D.I. Khan 30 7,326 853 4.1 35 116
Bannu 27 1,227 676 22.0 40 551
Charsadda 27 996 1,022 27.1 26 1,026
Lower Dir 24 1,582 718 15.2 33 454
Karak 23 3,372 431 6.8 53 128
Malakand 23 952 453 24.2 51 475
Chitral 19 14,850 319 1.3 60 21
Upper Dir 13 3,699 576 3.5 23 156
Tank 12 1,679 238 7.1 50 142
Buner 10 1,865 506 5.4 20 271
Hangu 8 1,097 315 7.3 25 287
Lakki Marwat 5 3,164 490 1.6 10 155
Shangla 5 1,586 435 3.2 12 274
Kohistan 4 7,492 473 0.5 8 63
Batgram 1 1,301 307 0.8 3 236
FATA 50 27,220 3,176 1.8 16 117
Kurram Agency 16 3,380 448 4.7 36 133
Khyber Agency 10 2,576 547 3.9 18 212
Bajaur Agency 8 1,290 595 6.2 13 461
N. Wazirastan Agency 7 4,707 361 1.5 19 77
Malakand Agency 3 4,813 235 0.6 13 49
Mohmand Agency 3 2,296 334 1.3 9 146
Orakzai Agency 2 1,538 225 1.3 9 147
S. Wazirastan Agency 1 6,620 430 0.2 2 65
Northern Areas 36
Islamabad Capital Territory 134 906 805 147.9 166 881
Pakistan 6,579 796,096 132,352 8.3 50 166
AJK 336
Grand Total 6,915
Source: SBP (2003)
19

Table 4.2: Share of NWFPs Financial Sector in Pakistan

Branches
in NWFP
Branches
in Pakistan
Share of
NWFP %
Deposits
Rs million
Share of
each bank
2003 2003 1997 1997
Allied Bank of Pakistan Ltd. 108 782 13.81 63,430 6.90
Askari Commercial Bank Ltd. 5 50 10.00 19,482 2.12
Bank Al Habib Ltd 1 59 1.69 13,445 1.46
Bank Alfalah Ltd. 4 45 8.89 13,445 1.46
Bolan Bank Ltd. 4 51 7.84 5,761 0.63
Faysal Bank Ltd 1 25 4.00 15,755 1.71
First Women Bank Ltd. 4 39 10.26 2,162 0.24
Habib Bank Ltd. 183 1,424 12.85 211,383 23.00
I.D.B.P 2 20 10.00 10,518 1.14
Kasb Bank ltd 1 19 5.26 0.00
Metropolitan Bank Ltd 7 35 20.00 9,608 1.05
Muslim Commercial Bank Ltd. 113 1,025 11.02 124,391 13.53
National Bank of Pakistan 158 1,183 13.36 254,863 27.73
PICIC Commercial Bank Ltd 3 48 6.25 0.00
Prime Bank Ltd 1 35 2.86 6,866 0.75
Saudi Pak Commercial Bank Ltd 2 28 7.14 0.00
Soneri Bank Ltd 2 39 5.13 9,845 1.07
Standard Chartered Bank 1 22 4.55 16,267 1.77
The Bank of Khyber 21 30 70.00 6,160 0.67
The Bank of Punjab 2 243 0.82 15,797 1.72
Union Bank Ltd 7 44 15.91 11,695 1.27
United Bank Ltd. 138 1,096 12.59 106,711 11.61
Zarai Taraqiati Bank Ltd 38 345 11.01 1,494 0.16
Total Banks 806 6,687 12.05 919,078 100.00
NBFIs (# of Companies)
Leasing Companies 6 29 21
Modarabas 1 38 3
Investment banks 1 12 8
Housing finance 1 3 33
Discount houses
Insurance companies 54 0
Post offices (Branches) 2,050 12,254 16.73 81,732
Urban 178 1,808 9.85
Rural 1,872 10,446 17.92
National savings 58 366 15.85
Source: SBP (2003),
20

Table 4.3: Regional Pattern of Sheduled Bank Branches in NWFP and FATA
Urban DHQs DHQs Semi-Urban Rural
Number Proportion branches branches Number Proportion
as a as a Total
proportion proportion
of urban of urban
NWFP 538 63.5% 368 68.4% 309 36.5% 847
Peshawar 140 87.5% 136 97.1% 20 12.5% 160
Mardan 44 62.9% 24 54.5% 26 37.1% 70
Mansehra 38 62.3% 11 28.9% 23 37.7% 61
Kohat 35 52.2% 19 54.3% 32 47.8% 67
Swat 32 44.4% 21 65.6% 40 55.6% 72
Abbotabad 29 42.6% 19 65.5% 39 57.4% 68
Haripur 26 66.7% 15 57.7% 13 33.3% 39
Nowshera 25 73.5% 12 48.0% 9 26.5% 34
Charsadda 23 85.2% 8 34.8% 4 14.8% 27
D.I. Khan 21 70.0% 21 100.0% 9 30.0% 30
Malakand 19 82.6% 6 31.6% 4 17.4% 23
Swabi 19 42.2% 6 31.6% 26 57.8% 45
Bannu 17 63.0% 13 76.5% 10 37.0% 27
Chitral 15 78.9% 10 66.7% 4 21.1% 19
Tank 12 100.0% 10 83.3% 12
Lower Dir 9 37.5% 6 66.7% 15 62.5% 24
Hangu 8 100.0% 8 100.0% 8
Karak 6 26.1% 5 83.3% 17 73.9% 23
Upper Dir 6 46.2% 6 100.0% 7 53.8% 13
Buner 4 40.0% 2 50.0% 6 60.0% 10
Shangla 4 80.0% 4 100.0% 1 20.0% 5
Lakki Marwat 3 60.0% 3 100.0% 2 40.0% 5
Kohistan 2 50.0% 2 100.0% 2 50.0% 4
Batgram 1 100.0% 100.0% 1
Tribal Areas 38 76.0% 27 71.1% 12 24.0% 50
Kurram Agency 13 81.3% 7 53.8% 3 18.8% 16
Khyber Agency 9 90.0% 5 55.6% 1 10.0% 10
N. Wazirastan Agency 6 85.7% 5 83.3% 1 14.3% 7
Bajaur Agency 5 62.5% 5 100.0% 3 37.5% 8
Mohmand Agency 2 66.7% 2 100.0% 1 33.3% 3
Malakand Agency 1 33.3% 1 100.0% 2 66.7% 3
Orakzai Agency 1 50.0% 1 100.0% 1 50.0% 2
S. Wazirastan Agency 1 100.0% 1 100.0% 0.0% 1
Total 576 64.2% 395 68.6% 321 35.8% 897
Source: SBP (2003)

21
among these banks is quite intense and cost of intermediation has fallen sharply in recent
years. These privatized banks and the newly scheduled private banks have a large
outreach. Public sector banks consist of four commercial banks, NBP, FWB, BOK and
BOP, and two specialized banks ZTBL and IDBP. The only provincial cooperative bank
was closed a few years back.

Bank interest rates have fallen sharply in recent years. Besides increased competition, the
fall in interest rates in the post 9/11 years was largely due to influx of foreign remittances
(average of over $4b for five years) and inflow of foreign aid and the consequent low
government borrowing. Huge sums of money have been disinvested from NSSs since
their profit rates were slashed, which were transferred to banks and other FIs. Thus
average lending rate of commercial banks fell from 13.6% p.a. in June 2001 to 7.28% p.a.
in June 2004 while the corresponding average deposit rate fell from 5.27% p.a. to 0.95%
p.a.

On the other hand, transaction costs have increased with new regulatory requirements of
equity/liquidity, management/governance structures, credit assessment, and transparency
and reporting requirements. Documentation needs have thus increased both on deposits
and advances sides. Reporting of financial transactions has increased. All transactions
above a threshold are reported to SBP. Details of borrowers of amounts equal to or more
than Rs. 500,000 are reported to the CIB/SBP, who check for default and advise back. A
private firm, DataCheck based in Karachi, provides similar services to FIs on smaller
loans of consumer finance. Some banks have, consequently, impose certain requirements
and set their tariffs too high (i.e. the minimum level of deposits, monthly service charge,
check cost, remittance and other transaction costs, etc.).

Among the specialized banks, ZTBL appear to have an elaborate network of branches
and regional offices to serve in rural areas, offering production and capital loans for
tractors, machinery, etc. for agriculture and general loans under its schemes of rural credit
and micro credit. It primarily lends by using the credit lines from SBP; hence its deposit
base is very small. The Bank faces a serious problem of stuck up loans, and is required to
implement stricter prudential regulations. Hence lending for development category has
shrunk to about 20% of its portolio, which is being attributed to the PR requirement of
deposit of registration documents of tractors with ZTBL. The ZTBL has good outreach in
rural areas through its mobile credit officers who render investment advice besides the
usual credit supervision. The outreach of IDBP is limited to four branches with shrinking
level of operations.

The cooperative finance has failed in NWFP, although there is a large number of
cooperative societies (8,434 in total, of which 8,127 are agricultural). The Provincial
Cooperative Bank, established in 1995, is in the process of liquidation since 2001, and an
amount of Rs 300 million is stuck in outstanding loans, of which about one third is the
accrued interest. Since the Cooperative Bank loans were cheaper than the ZTBL loans,
efforts are being made to revive the Bank. But there are many problems. Loan recovery is
low because of the withdrawal of certain powers from banks and politically motivated
22
policy pronouncements; local traditions hinders sale of mortgaged property to recover
loans; and writ of the government has weakened overtime.

Banks are, as reported earlier, now expanding their branches in NWFP under the
influence of the stated policy of the SBP which aims to close/merge the banks at the
smaller end. Automated and electronic means of financial transactions are also gradually
expanding. Although the number of credit, debit and ATM cards has grown sharply, the
value of transactions through these means is still very limited.

Muslim Commercial Bank in NWFP3a Case Study

Muslim Commercial Bank (MCB) is the first privatized bank in Pakistan. Currently it has
942 branches in Pakistan; 57 percent in Punjab, 21 percent in Sindh, 19 percent in
NWFP, and 3 percent in Balochistan.

This bank has branch network in 22 out of 24 districts of NWFP. At present 104 branches
are working in this province with a staff strength of 792. Business concentration, physical
infrastructure, and competitors behaviour are the important factors for MCB to open a
branch.

MCB offers services related to deposits, ATMs, money transfer, handling of utility,
imports and exports bills, lending services, sale and purchase of government securities
and so on.

Deposit Services

In 2004, 8.8 percent of total accounts of MCB were in NWFP that keep the amount of Rs
363,575 million that is 9.3 percent of total deposit amount of this bank in Pakistan.
During 2001-04, the number of accounts has declined from 404 thousand to 364 thousand
in NWFP. This decline is mainly because of decline in the number of PLS and fixed
accounts. However, total amount in deposits has increased at a rate of 5 percent per
annum. Highest growth rate was observed in the amount in current accounts followed by
PLS accounts. Amount in fixed deposits has declined by 13 percent per annum. This
indicates a shift from interest earning deposits to non-interest earning deposits. This is
due to drastic decline in the rate of profits and loss on PLS accounts and average mark up
rate on fixed deposits. The rate of profit and loss has declined from 4.48 percent to 0.85
percent during 2001 to 2004. And the average mark-up rate on fixed deposits has
declined from 9.06 percent to 1.77 during this period [see table 4.2].







3 We are grateful of Mr. Imtiaz Ahmad, General Manger, Peshawar for providing the information on the
services of MCB in NWFP.
23
Table 4.2: Deposit Services of MCB in NWFP
2001 2002 2003 2004
Growth rate
(2001-04) (%)
# of Total Deposits 404,185 398,963 374,554 363,575 -2.6
Amount (Rs million) 16,835 18,314 20,101 20,499 5.0
Average rate of profit/loss on PLS
accounts (%) 4.48 3.14 1.18 0.85 -34.0
Average rate of return on fixed
deposits (%) 9.06 7.32 3.12 1.77 -33.5
# of accounts

Current deposits as % of total
deposits 12.84 14.93 17.41 19.97 8.8

PLS deposits as % of total
deposits 79.02 79.26 77.75 76.10 -3.5

Fixed deposits as % of total
deposits 4.81 4.13 3.32 2.62 -16.3
Amount

Current deposits as % of total
deposits 19.40 20.02 24.18 28.58 15.7

PLS deposits as % of total
deposits 50.42 53.13 54.60 55.65 7.7

Fixed deposits as % of total
deposits 22.54 20.52 16.09 10.61 -13.0
Source: Based on the data provided by the MCB, Peshawar

Muslim Commercial Bank maintains four types of foreign currency accounts. These are
foreign currency current accounts, foreign currency savings accounts, foreign currency
term deposits and dollar khushali bachat accounts. In NWFP, the number of foreign
currency accounts increased from 3,717 to 4,092 from 2001 to 2002 and then declined to
3,987 in 2004. Similar trend has been noted in the amount in these accounts. This amount
is 10 percent of total amount in foreign currency accounts in MCB in Pakistan.

ATM Services

MCB has a large network of ATM service, covers 30 cities with 197 ATM locations.
MCB charges Rs 250 to obtain an ATM classic card and Rs 350 to obtain a gold ATM
card. MCB ATM is functional at 217 locations in Pakistan. Out of this, 11 are in NWFP.
Regular ATM card allows the maximum withdrawl of Rs 10,000 per day with maximum
3 transactions. MCB ATM gold card allows a maximum limit of Rs 25,000 with a
maximum 6 and minimum 2 withdrawls. MCB ATM can also be used outside Pakistan
and allows a maximum limit of equivalent to US$ 200 per day. These are also classic and
gold ATM cards. Fee of obtaining these cards is Rs 400 and 500 respectively. A
minimum balance of Rs. 1000 is to be kept in reserve. US$ 3 or 2.75 percent of cash
withdrawl is charged on international transactions and $ 1 on balance statement. ATM
card holders can also avail the service of mobile banking without any additional charges.

Debit and Credit Card Services

The ATM card can be used as debit card and allows 15 purchase transactions per day.
24
Currently, this card can be used at 400 locations in Karachi only. MCB Master Card was
introduced in 1995. This card can be used at 3,000 outlets in Pakistan and over 15 million
outlets in 232 countries. One time joining fee for MCB Master Card for the use in
Pakistan and for international use is Rs 1,000. Annual fee for the card used in Pakistan is
Rs 1,000 and that for international use is Rs 1,500. joing fee for MCB Master Gold Card
is Rs 2,000 and its annual fee is Rs 4,000. Late payment service charges are 4 percent or
Rs.100 (whichever is higher) after due date of payment. Card replacement fee in case of
loss is Rs.250. Cheque return charges are Rs. 250. Domestic disputes handling charges
are Rs.300 per dispute + financial cost (if charge not resolved in favour of cardholder).
International dispute handling charges are Rs.500 per dispute + financial cost (if charge
not resolved in favour of cardholder).

Fund Transfer Services

MCB provides domestic as well as international fund transfer services to its customers.
Domestic transfers take one day and three days are required for international transfers.
Domestic funds received in NWFP has declined by 3 percent per annum during 2001-
2004. However, domestic funds sent from NWFP grew at an annual rate of 13 percent
during the same period. International funds received in NWFP grew at higher rate (20%)
than the funds sent (5%) from NWFP during this period [see table 4.3]. The service
charges on domestic fund transfer are higher than that on international fund transfers. For
example, MCB charges 0.10 percent of the amount as fee on domestic transfers and 0.01
percent on international transfers.

Table 4.3: Fund Transfer Services of MCB in NWFP
2001 2002 2003 2004
Growth rate (2001-
04) (%)
Domestic Funds

Funds received in NWFP
(million Rs) 88,484 91,682 95,627
78,89
8 -3

Funds sent from NWFP
(million Rs) 52,031 68,787 87,429
83,50
9 13

Amount earned as fee of
domestic fund transfers (000
Rs) 71 65 65 70
International Funds

Funds received in NWFP
(million Rs) 2,358 2,321 3,843 4,908 20

Funds sent from NWFP
(million Rs) 2,985 3,147 3,270 3,603 5

Amount earned as fee of
international fund transfer
(000 Rs) 1.00 1.02 1.44 1.77
Source: Based on the data provided by the MCB, Peshawar

Service charges vary according to the mode used to transfer money. For example,
minimum Rs 50 are charged on a pay order from account holders and Rs 100 from non-
account holders. Students are charged Rs 25 per pay order for the payment of fee
favouring any educational institution. Charges on the issuance of duplicate pay order are
Rs 100 from account holders and Rs 150 from non-account holders.
25

Service charges on bank draft vary with amount. For example, these are 0.10 percent,
0.05 percent and 0.04 percent for the amounts up to Rs. 100,000, Rs 1,000,000, and Rs
10,000,000, respectively. On the issuance of duplicate drafts, bank charges Rs 200 from
account holders and Rs 250 from non-account holders. Charges of inter-branch fund
transfers through MT,TT,FAX-PRESS are 0.10 percent with minimum Rs.100.

In case of telegraphic transfer of money Rs. 3 plus cost of money order or telegram are
charged. No money is charged on money order or telegram if funds are remitted to branch
of the same bank.

In case of Inward Foreign Draft, bank charges 0.15 of the amount with minimum charges
Rs.200.

Inward cheques expressed in foreign currency for payment in Pak Rupees after
conversion at authorized dealers buying TT clean rates, bank charges 0.15 percent as
commission with minimum charges Rs.200.

In addition to above, commission / service charges / recovery of courier /postage/
telex/fax/cable charges should also be made according to prescribed tariff (wherever
applicable).

On international (outward) remittances from foreign currency accounts, bank charges a
minimum of US$ 5 per item up to the value of Rs 10,000 or its equivalent. Or a flat rate
of 0.01 percent per item for value of over Rs 10,000 or its equivalent is applied with
minimum US$ 8 and maximum US$ 75.

Depositing of foreign currency notes in foreign currency account involves a charge of
0.50 percent upfront with maximum limit of Rs 400.

Charges on inward collection of foreign currency from abroad are US$ 1 per US$ 1,000
subject to minimum US$ 3 and maximum US$ 6.

Charges may be waived by the General Manager if the customer maintains average
balance of Rs 1.0 million in current account or US$ 0.05 million in foreign currency
current account.

Travelers cheques expressed in foreign currency are also a mode of money transfer. Bank
charges 1 percent of the amount of travelers cheques sold with minimum charges of Rs
200. Charges on the rupee travelers cheques are Rs 5 per piece.


Bill Handling Services

26
MCB handles utility, imports and exports bills. The amount handled under the head of
utility bills has increased by 18 percent per year during 2001 to 2004. During this period
export and import bills have grown at annual rates of 21 and 24 percent respectively.

Lending Services

The amount disbursed by the MCB in NWFP is about 5 percent of the total amount
disbursed in Pakistan by this bank. However, a considerable progress in the number and
amount of loans disbursed by MCB in NWFP has been observed. The number of
borrowers has increased from 4,070 to 5,852 during 2001-2004. A significant progress in
the number of female borrowers has been noted. Out of these 30 percent were from rural
areas in 2004. This proportion was only 16 percent in 2001. Most of the females
borrowed for consumption purposes. Nearly 60 percent loans were consumption loans
thats females borrowed in 2004. About 64 percent loans were disbursed in urban areas in
2001. This proportion declined to 44 percent in 2004. This indicates more loans are now
going to rural areas. However, amount of loans disbursed in urban areas is much larger
than that is disbursed in rural areas. Yet the amount disbursed in rural areas has grown at
much higher rate (13%) than the amount that was disbursed in urban areas (6%). MCB
disburses agricultural, corporate loans, SME, and consumption loans. Annual mark-up
rate differs according to the type of loan. In 2004, highest mark-ip rate was for
agricultural loans (12%), followed by SME loans (11%). Consumption loans were
disbursed at a rate of 3 percent in 2004. No change has been observed in the mark-up rate
of agricultural and consumption loans. However, a decline in this rate on corporate and
SME loans is noted. Most of the loans are disbursed for less than one year period. But the
amount of most of the loans is more than Rs. 100,000. The amount of loans of more than
one-year period is growing at an annual rate of 32 percent. This growth is found 5 percent
for the amount of short-term loans.

Average size of loan in NWFP remained in the range of Rs 600,000 to 700,000 during
2001-2004. An average loan of more than Rs 100,000 is of more than Rs 700,000. Loans
of more than Rs 100,000 are few in number and the average size of such loans is not
more than Rs. 70,000 [see table 4.4].

Table 4.4: Lending Services of MCB in NWFP
2001 2002 2003 2004
# of loans in NWFP as % loans in Pakistan 8.52 10.14 8.03 9.02
Number of loans
Short term loans as % total loans in NWFP 68.14 67.96 67.97 73.81
Long term loans as % total loans in NWFP 31.86 32.04 32.03 26.19

Loans up to Rs 100,000 as % of total loans in
NWFP 11.27 11.16 11.22 10.39

Loans more than 100,000 as % of total loans in
NWFP 88.73 88.84 88.78 89.61
Urban loans as % of total loans in NWFP 63.79 64.42 45.48 43.65
Rural loans as % of total loans in NWFP 36.21 35.58 54.52 56.35
Amount of loans in NWFP as % Pakistan 5.56 5.71 4.58 4.42
Amount of loans
Short term loans as % total loans in NWFP 94.92 92.88 89.33 88.23
27
Long term loans as % total loans in NWFP 5.08 7.12 10.67 11.77

Loans up to Rs 100,000 as % of total loans in
NWFP 1.09 0.98 1.08 1.04

Loans more than 100,000 as % of total loans in
NWFP 98.91 99.02 98.92 98.96
Urban loans as % of total loans in NWFP 85.63 84.67 81.40 82.36
Rural loans as % of total loans in NWFP 14.37 15.33 18.60 17.64

Average annual markup rate (%) 9 8 8 8
Average size of loans
Average size of loan (Rs) 689,059 680,322 727,787 656,622
Average size of short-term loans (Rs) 959,919 929,718 956,505 784,885
Average size of long-term loans (Rs) 109,881 151,236 242,505 295,103
Average size of loan up to 100,000 (Rs) 66,899 59,651 70,158 65,510
Average size of loans more than 100,000 (Rs) 768,053 758,277 810,858 725,142
Recovery rate in NWFP (%) 96 98 97 98
Source: Based on the data provided by the MCB, Peshawar

Average annual mark-up rate has declined from 9 percent in 2001 to 8 percent in 2004.
The recovery rate shows an improvement from 96 percent in 2001 to 98 percent in 2004.

A loan application can be submitted in any of the branch of MCB. However, application
is processed at regional office. Real estate is the most common collateral. Bank secures
96 percent of loan through collateral. It takes 8 days to process a loan application. Most
important factors in making decision about a loan application are income/employment
history of loan applicant followed by collateral. A loan application can be rejected if an
applicant possess unsatisfactory cash flow, inadequate collateral or bad credit history.
Service charges are levied to process a loan application. On easy personal loans, bank
charges 1 percent of the loan amount as fee. Fee to process an application for house
finance is Rs 5,000 and for Auto loan is Rs 3,500. These fees are non-refundable.

Fee Structure of MCB on Regular Services
Bank charges on the issuance of duplicate or photostat copy of the bank statement
are Rs.50 per statement
Charges on issuance of fresh bank statement of account other than 1/2 yearly
statement are Rs.50
Charges on the issuance of loose (counter) cheque are Rs.50 per cheque for local
currency account and US$ 1 for Foreign Currency Account.
Charges on the issuance of Cheque Book are Rs.3 per leaf plus excise duty.
Charges on the issuance of new cheque book in lieu of lost cheque book are
Rs.100 per request plus excise duty.
Stop payment charges per instruction are Rs.150 for local currency account and
US$ 3 for foreign currency account and foreign currency cheques/drafts.
Account closing processing cost for local currency accounts is Rs.250 or the
entire amount if balance is below Rs.250. This amount for foreign currency
account (other than the frozen accounts) is US$5 or the entire amount if balance is
below US$ 5.
28
Charges on account maintenance/service charges are Rs.50 per month on
minimum monthly average balance of Rs.10,000 or below in all PLS savings and
current deposit accounts.
Account maintenance charges on foreign currency accounts having balance less
than US$100 are US$ 2 per month
Merchant service charges at merchant location on cash up to Rs 3,000 on Debit
Card are Rs 25 per transaction and up to Rs 5,000 are Rs 50 per transaction.
Cash on Debit Card through POS ( at Branch location) Up to Rs.5,000 are Rs.50
per transaction, from Rs.5,001 to Rs.10,000 are Rs.100 per transaction, and from
Rs.10,001 to Rs.25,000 are Rs.200 per transaction.
Charges on cross branch transaction are as follows
Current account PLS account
Up to Rs 500,000 Rs 100 Rs 50
Rs 500,001 to Rs 1,000,000 Rs 200 Rs 100
Rs 1,000,001 and above Rs 400 Rs 200

Dispute Handling Charges on domestic sales transaction dispute for debit cards
are Rs.150 (flat) per dispute contested. International Sales Transaction dispute for
debit cards are Rs.250 (flat) per dispute contested.
Charges for the request of Cheque Book through Smart Card are Rs.25 per
request. Customer is informed through a post card that involves postage charges.
Charges for the request of Statement of Account through Smart Card are Rs. 25
per request. Customer has to collect this statement from home branch.
Transaction made on other Banks ATMs Overseas and in Pakistan Charges
2.75% or US$ 3 per transaction (whichever is higher).
Balance Enquiry on other Banks ATMs Charges equal to US$ 1 per transaction.
Charges of balance inquiry are Rs. 2 per transaction.
Charges of Mini Statement are Rs. 5 per transaction.
Internal Funds Transfer through Smart Card from customer's one account to
another account for a maximum amount of Rs. 20,000 are up to Rs. 20 per
transaction.
Charges of utility bills payment through Smart Card are up to Rs. 15 per
transaction.
Charges of mobile phone bill payment through Smart Card are up to Rs. 17 per
transaction.
Charges of MCB 1-link switch transactions are up to Rs. 15 per transaction.
Charges of balance inquiry through mobile SMS are Rs. 2 per transaction
Charges of mini statement through mobile SMS are Rs. 5 per transaction
Charges of bill Payment through mobile SMS are Rs. 17 per transaction


The prospects of MCB are expected to be bright in future, especially in view of recent
trade liberalization and stability and peace in Afghanistan. However, lack of
industrialization, lack of technical know-how and insufficient infrastructure are identified

29
Soneri Bank in NWFP a Case Study

Soneri Bank is incorporated as a private commercial bank since September 28, 1991. The
first branch was opened in Lahore in April, 1992 followed by Karachi Branch in May,
1992. The bank now operates with 52 branches spread all over Pakistan. Two branches of
Soneri Bank are functioning in NWFP. Both these branches are in Peshawar. The main
branch, Peshawar was established in 1992 and Chowk Yadgar branch started its functions
in 2002. Business concentration, population, and government encouragements are the
important factors reported by the Soneri Bank for its opening of the new branch.

Soneri Bank offers services relating to deposits, ATMs, money transfers, handling of
import and export bills, lending services, sale and purchase of government securities and
other standard banking functions.

Deposit Services

In 2004, over 3 percent of the total number of accounts of Soneri Bank were in NWFP.
The total deposits in these accounts were Rs 510 million which is 1.4 percent of the total
deposits held by this bank throughout Pakistan. During 2001/04, the number and amount
of total deposits in NWFP increased by 5.6 and 4.6 percent per annum respectively.
However, a significant decline in the number and amount of PLS account and a marginal
decline in the number and amount of fixed deposits has been observed during this period.
This period witnessed a decline in the average rate of profit and average rate of return on
fixed deposits. The profit rate declined from 9.5 percent to 2 percent and the rate of return
on fixed deposits declined from 11 percent to 3 percent during this period [see table 4.5].

Table 4.5: Deposit Services of Soneri Bank in NWFP
2001 2002 2003 2004
Number of Total Deposits 5,911 6,495 6,905 7,348
Amount (Rs million) 426 510 337 510
Average rate of profit/loss on PLS accounts (%) 9.5 9.0 4.5 2.0
Average rate of return on fixed deposits (%) 11.0 10.0 3.0 3.0
Number of accounts
Current deposits as % of total deposits 30.67 31.78 33.74 40.46
PLS deposits as % of total deposits 50.58 50.02 48.57 46.38
Fixed deposits as % of total deposits 1.32 1.29 0.84 1.06
Amount
Current deposits as % of total deposits 10.15 36.09 34.03 32.08
PLS deposits as % of total deposits 64.93 42.43 54.09 48.40
Fixed deposits as % of total deposits 19.25 15.70 11.78 19.46
Source: Based on the data provided by the Main Branch, Soneri Bank, Peshawar

Soneri Bank also maintains foreign currency accounts. In NWFP, the number of foreign
currency accounts increased from 1,108 to 1,266 during 2001 to 2004. However, a
decline in the amount in these accounts from US$ 1.334 million to US$ 1.030 million
was observed during this period.

ATM Services
30

Soneri Bank ATM Card can be obtained by maintaining a Rupee Savings or Current
Account with any of the on-line branches. A fee of Rs. 200 is charged to obtain an ATM
card. In NWFP, there is no ATM network of Soneri Bank, however, cash withdrawal and
balance inquiry facility is available at any ATM machine of the 1-link member banks in
NWFP. Services charges on using the ATM of any other bank are Rs. 15 per transaction
4
.
This amount is charged by the bank whose ATM machine is used. Per day limit of
withdrawal on ATM card is Rs. 20,000.

Fund Transfer Services

Soneri bank provides domestic as well as international fund transfer services to its
customers. Domestic transfers can be received the same day when they are sent.
International transfers take one working day to reach at their destination. An increase in
the domestic transfers and a decline in the international transfers through Soneri bank has
been observed during 2001/2004 period. However, domestic funds sent have grown at
higher rate (13.6%) than that are received (12.2%). Similar trend has been found in
international transfers. Soneri bank charges 0.25% to 0.055% of the amount as fee on
domestic transfers. On pay orders, bank charges Rs 25 per pay order. These charges on
per bank draft are 2.25% to 0.055 percent. Fee of international transfers is a maximum of
US$ 28. Funds transfer data is given in Table 4.6

Table 4.6: Fund Transfer Services of Soneri Bank in NWFP
Funds Transferred (Rs million) 2001 2002 2003 2004
Compound
growth rate
(2001-04) (%)
Domestic funds received in NWFP 5,897 6,948 7,838 9,366 12.26
Domestic funds sent from NWFP 5,994 6,732 8,754 9,973 13.57
International funds received in NWFP 2,621 1,675 3,543 474 -34.79
International funds sent from NWFP 2,414 1,992 480 315 -39.90
Source: Based on the data provided by the Main Branch, Soneri Bank, Peshawar

Bill Handling Services

Soneri Bank does not deal in utility bill handling. However, it provides the services of
import and export bill handling. During the period of 2001/04, export bill handling by
this bank has declined from Rs. 668 million to Rs. 500 million. On the other hand, the
import bill handling has increased from Rs 41 million to Rs 186 million during the same
period.

Lending Services

The amount disbursed in different lendings by the Soneri bank in NWFP is less than 1
percent of the total amount disbursed in Pakistan by this bank. However, a considerable
progress in the number and amount of loans disbursed by Soneri bank in NWFP has been

4 This is a reciprocal charge with the Soneri Bank Charging Rs 15 if the ATM card of any other bank is
used on the machine of Soneri banks ATM machine.
31
observed because of the small base from which it started. All of the loans are disbursed in
urban areas. Most of the loans are either SME loans or consumption loans. However, in
2002 and 2003 the bank disbursed a few agricultural loans also. On the average, one
borrower borrows more than one (1.05) loan in a given year. There was no female
borrower in 2001. The females borrowing started in 2002 and now the total of female
borrowers is 5 [see table 4.7]. The amount of loans has also increased from Rs 36.7
million to Rs 127 million during 2001/04.

Table 4.7: Lending Services of Soneri bank in NWFP
Source: Based on the data provided by the Main Branch, Soneri Bank, Peshawar
.

It is interesting to note that most of the loans were short-term (less than a year) up to
2003. However, in 2004, the number of long-term loans was higher than the short-term
loans. The total amount of long-term loans was, however, less than the amount of short
term loans in that year. The average size of short-term loans was Rs 1.87 million whereas
the average size of long-term loans was only Rs 257,205. Average annual mark-up rate
was the same for both types of loans. This rate declined from 18 percent in 2001 to 9
percent in 2004. This bank reported a recovery rate of more than 99 percent.

The Bank secures 85 percent of its loan through collateral. Most important factor in
making decision about a loan application is the credit history of loan applicant followed
by income/employment history and purpose of loan. A loan application can be rejected if
of the first two criteria are not adequately met.

The Bank of Khyber

The Bank of Khyber was established in 1991 as a commercial bank. It is principally
engaged in the business of commercial, investment and development banking. By the end

2001 2002 2003 2004
Compound
growth
rate (2001-
04) (%)
Total Loans

Number of loans in NWFP 45 60 86 131 30.62

Number of borrowers in NWFP 42 58 83 123 30.82

Number of females borrowers in NWFP 0 2 3 5

Amount of loan in NWFP (Rs million) 36.7 60.1 74.4 127.0 36.38

Average annual markup rate(%) 18 14 12 9 -15.91
Loans up to 1 year


Number of loans in NWFP 39 41 40 58 10.43

Number of borrowers in NWFP 36 39 37 50 8.56

Number of females borrowers in NWFP 0 0 1 2

Amount of loan in NWFP (Rs million) 33.5 52.3 59.9 108.2 34.08
Loans more than 1 year

Number of loans in NWFP 6 19 46 73 86.76

Number of borrowers in NWFP 6 19 46 73 86.76

Number of females borrowers in NWFP 0 2 2 3

Amount of loan in NWFP (Rs million) 3.2 7.8 14.5 18.8 55.39
32
of 2003, there were 29 branches of this bank. Out of which 23 were located in NWFP and
6 in major cities of Pakistan outside NWFP. Deposits of this bank increased from Rs
9,630 million in 1998 to Rs 16,659 million by the end of June 2004. Bank of Khyber
launched its micro business development program in 1997 through a credit line from
Asian Development Bank (ADB). BOK started its lending under Barani Area
Development Project (BADP-I) followed by Dir Area Support Program (DASP) and
Malakand Rural Development Project (MRDP). Bank has extended loans through third
party linkages. In this regard, NGOs and RSPs played a crucial role in the process of
social mobilization at grass root level. Bank of Khyber provided individual loans for
micro entrepreneurs as well as extended group lending. By the end of June 2004, BOK
had disbursed loans worth Rs 924.6 million to 19,745 borrowers. Average size of loan
was Rs 28,332.

By the end of February 2005, there were 15,949 loans that were up to Rs 100,000 and
1,818 bigger than that. The total amount disbursed was Rs 1,027 million. Of the total,
9,462 loans amounting Rs 598 million were adjusted loans.

Case Study of the Bank of Khyber Timergara Branch

The Timergrara branch of BOK was established in 1997. Since 1999, the number and
amount of active loans increased at an annual rate of 42 percent and 20 percent,
respectively. Average loan size declined from Rs 11,172 in 1999 to Rs 4,268 in 2004.
The amount of loan outstanding has doubled in 2004 relative to 1999 [see table 4.8]. The
poor performance of loan recovery can be seen through increasing number and amount of
delinquent loans with past over due of 30 days and classified loans with past over dues by
90 days and above. At present, delinquent loans are 51 percent of the active loans. This
proportion was 24 percent in 1999. The number of classified loans has increased sharply
during this period (at an average annual rate of 95%). Currently such loans are 31 percent
of the total active loans.
33
Table 4.8: Lending by the Bank of Khyber, Timergara Branch
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Jul-04
Compound
growth rate
(1999-04)
(%)
Number of loans 58 196 387 390 473 470 41.72
Number of clients 85 233 403 400 484 481 33.49
Loans disbursed
(Rs 000) 6,480 16,008 24,335 22,280 21,291 20,058 20.72
Average loan size
(Rs) 11,172 8,168 6,288 5,713 4,501 4,268
Loans outstanding
(Rs 000) 5,565 12,117 15,552 12,056 12,417 10,825 11.73
Number of
delinquent loans 14 31 114 195 210 239 60.46
Total overdue in
delinquent loans
(Rs 000) 146 488 1,615 2,628 2,947 3,685 71.20
Delinquent loans as
% of active loans 24% 16% 29% 50% 44% 51%
Number of
classified loans 2 11 28 58 98 146 104.43
Total outstanding
in classified loans
(Rs 000) 71 902 1,533 2,285 2,699 3,959 95.54
Classified Loans as
% of active loans 3% 6% 7% 15% 21% 31%
Outstanding loans
at Risk 1% 7% 10% 19% 22% 37%
Source: Based on the data provided by the Bank of Khyber, Timergara Branch

Issues and Concerns

A broad analysis of institutional, inter-temporal and spatial aspects of the evolution of
access to financial services, based largely on the available data and interactions with FIs
managers reveals the following key points:

Scheduled banks remain the main providers of financial services in NWFP, and in
terms of bank branches, the province is below the national level but better served
than the province of Balochistan.
The aggregate supply of financial services appears to have increased over the past
years despite the contractions in the number of scheduled banks due to mergers
and closure of loss making bank branches.
There has been a significant shift in composition of service providers. With
privatization of banks, the share of private banks has risen sharply in terms of
institutional presence as well as the volume of business.
In line with the national trends, banks are expanding their outreach by issuing new
instruments and technologies like automobile, housing and other consumer
finance, ATMs, credit/debit cards, etc.
Newly chartered private banks have expanded their outreach very fast by opening
branches, issuing new financial instruments and using modern technologies, such
34
as ATMs, credit/debit cards, Islamic modes of banking, etc. However despite this
expansion, the share of these banks in terms of presence or volume of business
appears very small.
Banks tend to serve the relatively rich people. For all banks taken together, per
capita income tends to be positively associated with broad measures of access
such as density of banking institutions or the volume of loan and deposit services
they provide.
Most of the bank branches are located in Peshawar and central part of NWFP. The
institutional presence in the southern and northern districts is very limited. These
regional differences would further accentuate as the loss making branches of
privatized banks are likely to be closed.
Regulatory practices of know your client, verification of credit records from
CIB/DataCheck, insurance requirements, reporting requirements and other
documentation, as is felt by the stakeholders, have infringed upon privacy, added
to cost of business and restricted access. Some of these practices need to be
reviewed to create a better balance between business interests and the related
risks.
Some contrasts among the banks are noteworthy. Private and public sector banks
are similar in many respects; both tend to serve richer people and areas; both have
urban bias; and easily substitute each other in thinly populated areas. However,
the new private banks tend to chose better technology and have higher tariff
structure, while public banks including the privatized banks have lower tariffs and
better serve the poor.
Agricultural community appears to be inadequately served. Timely availability of
credit and other inputs are major problems of the agriculture sector in the NWFP.
Despite the recent increases in lending to agriculture, the lending level is much
lower (almost one fifth) of the needed/desired level assessed by the stakeholders.
Agriculture has also not received much attention from the GoNWFP; the package
of agricultural credit by the BOK is yet to be decided. There are several reasons
for the low level of lending to the agriculture sector. Some of these are:

o Population is conservative in their outlook and with a religious background
unwilling to accept interest related loans. Replacing interest with service
charges may be an option.
o ZTBL and other commercial bank lending appear to favor larger land
holdings.
o One window operation of ZTBL is not effective in the NWFP as officials of
the Revenue Dept do not cooperate. Malpractices by ZTBL officials also
been alleged. Passbook remains a big problem for the farmers. Lengthy and
complicated procedures discourage farmers from seeking loans. Allocation
of loans in the NWFP is higher but disbursement much smaller.
o Farmers have very low capacity to purchase inputs; prices of inputs have
risen relative to output prices over the past 20 years. Absentee landlords do
not provide inputs to the tenant on time.
o Several factors have adversely affected the viability and credit off-take for
agriculture. Crop prices relative to input prices have fallen. Poor
35
infrastructure increases the transaction costs of inputs and outputs and
impacts on the quality of the produce. There is no seed industry in the
province. Orchards are primarily owned by landlords/ Khans, and tenant
works in the orchard as a worker and do not share the income/production
from the orchard.
o Similarly credit needs of non-agricultural rural segments appear to remain
underserved.

There have been some expansions of new service delivery points, and growth of
some institutions, including the new private banks, insurance companies, leasing
companies, a modarba and MFIs. However, NBFIs have yet not penetrated far
and their share appears very small.

36
Chapter 5
Non Bank Financial Institutions (NBFIs)

A variety of institutions operate in this sector, catering for about 6-7 percent of the total
financing needs of the country as a whole. NBFIs are similar to banks since they mobilize
savings and lend/invest these savings on opportune places. NBFIs mostly generate
resources from equity, longer term certificates of investment/deposit, TFCs and bank
borrowing, while banks mostly rely on deposits, often subject to call. On the uses side,
NBFIs lend money to big clients and invest in loans for plant and machinery, vehicles,
while banks mostly do the commercial lending, i.e. the basic difference is in maturity.
The fundamental difference is on maturities; NBFIs deal in longer term maturities than
banks, both on resources and uses sides. This configuration is not water tight despite
statutory requirements, and there have been movements in both directions; banks have
entered in areas of business originally reserved for NBFI, while some NBFIs graduated to
become commercial banks.

Within NBFIs, there is a whole spectrum of institutions serving various market segments
in NWFP through their niche-specific specialized services and instruments. NBFIs have
traditionally been categorized into 8 groups, according to their main business focus.
Important groups are DFIs, mutual funds, leasing companies, development banks,
modarbas, housing finance companies, discount houses and venture capital companies.
All NBFCs are regulated by the SECP, except DFIs which are regulated by the SBP.

Eight DFIs lead the sector in terms of their assets size; of these six are joint ventures, one
is a financial supermarket and one SME Bank to cater to the financial needs of SMEs.
The asset portfolio of the joint ventures has gradually shifted from advances to
investments in PIBs and stock market shares during the past several years. Within this
group, the SME Bank has opened a branch in Peshawar. This branch is still grappling
with left-over accounts of its predecessor institutions (SBFC, YIPS and RDFC) and not
begun new operations.

Mutual funds lower the investment risk diversification for small investors and add
liquidity to the stock market. Mutual funds were introduced with the establishment of
NIT and ICP in the public sector, which enjoyed a monopoly status for quite some time.
More recently, the mutual fund sector has been opened to the private sector. A number of
private sector mutual funds, both open-end and close-end, have been established. Mutual
funds have been doing a roaring business in recent years with boom in the stock market.
Of the 30 mutual funds, the leading ones are NIT, UTP and related funds, PSF, PIF,
UMF, MSF series and Daood MMF. In NWFP, the access to most of the mutual funds is
indirect through stock brokers except for NIT which has branch operations in Peshawar
and Abbotabad.
Leasing companies initially focused on meeting the finance needs for the leases of
plants, machinery, vehicles, etc of the corporate sector. However, given the slow
economic growth and general slump conditions, this focus shifted to SMEs, agriculture
and consumer finance. The main sources of funds are equity and COIs. In more recent
37
years, the leasing industry has faced aggressive competition from large commercial banks
in the consumer finance and auto lease sector. Commercial banks have a competitive
edge over leasing companies in terms of their extensive branch network and a low cost of
funds. Reportedly, the leasing industry has withstood the challenge and handled a larger
volume of business. After mergers and closures, 26 leasing companies are operating in
Pakistan, of which 9 companies are active in NWFP.5

Network Leasing Company A Case Study6

The Network leasing company started its business in 1995 in Pakistan. It specializes in
financing of micro and small enterprise. This company operates in urban, semi-urban and
rural areas. Currently, three branches of this company are working in Pakistan, of which
one is operating in NWFP. Equity and borrowings are the main sources of finance. In
NWFP, the total number of cases of micro financing has increased from 45 to 60 in 2001
to 2004. Most of the financing was given for plant and machinery in industries and some
for office equipment and other requirements. Average rate of interest has declined from
19 percent in 2001 to 16 percent in 2004 [see table 5.1].

Table 5.1: Lease Financing of Network Leasing Company in NWFP
2001 2002 2003 2004
Number of total cases 45 50 55 60
Agricultural cases as % of total cases 15.56 16.00 14.55 15.00
Industrial cases as % of total cases 64.44 66.00 67.27 65.00
Office equipment cases as % of total cases 20.00 18.00 18.18 20.00
Amount (Rs 000) 2,030 2,245 2,544 2,742
Agricultural amount as % of total amount 9.90 9.80 10.26 9.85
Industrial amount as % of total amount 68.57 70.56 71.27 72.54
Office equipment amount as % of total amount 21.53 19.64 18.47 17.61
Average interest rate 19% 18% 16% 16%
Source: Based on data provided by the Network Leasing Company

Natover Lease & Refinance Limited

Natover Lease and Refinance Limited was established in 1984. At present, seven
branches of this company are working in Pakistan. Among them three are in NWFP.
Transport is the specialized area of financing of this company. The company has now
expanded its operations in the areas of agriculture, consumer finance, small and medium
enterprise, and industrial projects. The data in Table 5.2 show that number and amount

5 These include Orix Leasing Pak Ltd., Askari Leasing Ltd., Crescent Lease Corporation, Natover Lease
and Refinance, Network Leasing corporation, PICIC, Trust Investment Bank, Union Leasing, and First
Leasing Corporation.
6 Some data on the Orix Leasing Company was also available. The Orix Leasing Company was established
in 1986. This company provides lease financing to small and medium sized enterprises. Financing is
primarily provided for industrial machinery, commercial vehicles, private cars, computers and office
equipments. Orix Leasing started micro-leasing in NWFP in 1999. Currently, two branches of this company
are operating in NWFP. In 2003, Rs 32.2 million were disbursed in different areas of the province. Rs. 20
million were disbursed for leasing in the SME sector in 2004.

38
for other durables has increased sharply during the last three years. The amount of lease
finance for commercial vehicles also shows an increase of 103 percent per year. Unlike
other leasing companies, the annual rental rate differs across the products.

Development banks underwrite capital floats and restructuring, such as initial public
offerings, new issues, mergers, acquisitions and leveraged buyouts. Most investment
banks also maintain broker/dealer operations, and offer portfolio management and
advisory services to investors. Additionally, these banks can facilitate private equity
placements. Development banks have been loosing business focus and hence are a
dwindling institution since late nineties. Presently, their role is limited to syndicating
term-loans when possible, and maintaining their existing loan portfolios, and financing
some lucrative green field projects. These banks rely more on interest income rather than
fee-based income. Some of them are turning to more lucrative areas of the financial
sector, e.g., commercial banking, are vying for merger with commercial banks while
some are facing winding up proceedings. Of the six development banks, only two are
active in NWFP, viz. Prudential Investment Bank and Islamic Investment Bank. Even
these two banks are facing difficulties and cannot pay of their deposits (Prudential Bank
Rs 1.3-1.4 billion and Islamic Investment Bank Rs 145-150 million).
39
Table 5.2: Lease Financing of Natover Lease and Refinance Limited in NWFP

2001 2002 2003 2004
Compound
growth rate
(2001-04)
(%)
Plant/ Machinery

Number of cases 10 15 22 50 49.53

Amount (Rs) 4,328,800 4,096,700 11,320,860 12,343,108 29.95

Annual rental rate (%) 12.90% 12.70% 12.95% 12.75%
Commercial Vehicle

Number of cases 4 4 3 5 5.74

Amount (Rs) 329,900 329,900 2,730,000 5,611,000 103.08

Annual rental rate (%) 11.36% 11.36% 12.50% 11.82%
Personal Vehicles

Number of cases 21 53 46 71 35.60

Amount (Rs) 9,929,685 13,518,343 15,891,343 17,828,136 15.76

Annual rental rate (%) 12.15% 12.25% 11.90% 11.29%
Office equipment /computer


Number of cases 87 88 86 98 3.02

Amount (Rs) 5130251 5,848,442 4,666,320 4,486,608 -3.30

Annual rental rate (%) 12.15% 12.25% 11.90% 11.29%
Other durables

Number of cases 9 19 90 184 112.64

Amount (Rs) 617,590 1,549,616 2,654,357 9,660,241 98.87
Source: Based on data provided by the Natover Leasing Company

Modarabas use Islamic modes of finance, in which one party (modarba company)
contributes its skill and efforts while the other (modarba certificate holder) provides the
required funds. The profits are shared in a pre-specified manner. A modarba may be
multi-purpose or for a specific purpose, and may be perpetual or for a specified time
period. This is the largest group in terms of number of entities in sector although its share
in total assets of NBFIs is only around 6 percent. Modarbas have faced financial squeeze
in recent years due to increased competition from leasing companies and investment
banks and the withdrawal of tax-free status in 1992. Of the 42 modarbas, only 18-20 are
active, and over half a dozen modarbas have started operations in NWFP, including Al-
Zamin Leasing Modarba, General Leasing Modarba, Allied Bank Modarba, Habib Bank
Modarba.

Three housing finance companies operate in Pakistan and HBFC dominates the sector.
The HBFC heavily relies on secured lines of credit from SBP on a PLS basis to extend
fresh loans. Non-performing loans continue to be a problem for HBFC, although an
incentives package was announced in the federal budget 2004/05 to repay these loans on
softer terms. While all private sector companies are dormant, HBFC maintains operations
in NWFP.

Discount houses provide discounting/rediscounting services in government securities
and/or corporate bonds, which makes them an easy and quick source of short-term funds.
Discount houses in the country have performed poorly in the past due to absence of
underdeveloped bond market and competition from banks. Four discount houses are
40
operating in the country with an asset base of Rs 2 billion, dominated by one discount
house which accounts for about two third of total assets. Discount companies have no
operation in NWFP at present.

Venture capital companies (VCCs) finance new innovative enterprises. VCCs are very
important for a developing economy because banks and other financial institutions rarely
invest in new businesses. Banks generally do not have the required expertise for
monitoring newly started company operations. Presently, there are three VCCs in
Pakistan and none is active in NWFP.

Issues and Concerns

NBFIs are important for meeting the demands of underserved sectors, but as seen above,
their institutional presence is thin and operation levels are very low in NWFP. Several
reasons of this low access to NBFIs can be given. The generic reasons are institutional
from bigger players in banks, weak public commitment and support, and regulatory
weaknesses in defining and implanting institutional specific mandates. [Sohail, I cannot
understand initial wording in the sentence perhaps something is missing] The
information base on regional/provincial economy is very poor, and it is difficult for
private parties to gauge the market potential of a specific segment/instrument/vehicle.
Masses are illiterate, and religious and cultural values of a significant portion of the
people go against interest based instruments, and the poor law and order situation inhibits
outside influences. Further more, regulatory practices of equity capital requirements,
management governance structures and reporting and other transparency structures have
become more stringent. These market uncertainties, more stringent practices and
declining role of public sector institutions have hindered expansion of NBFIs operations
in NWFP.

Insurance companies cover financial risks in the economy and serve as institutional
investors for both capital and money market instruments. The core business of an
insurance company is to underwrite risk and to hedge against claims. It earns income by
investing the collected premiums in various investment options including government
securities.

The insurance industry is dominated by public sector companies. Life insurance industry
has a disproportionately high share because of the heavy weight SLIC, which alone owns
over 70 percent of the industry assets. Similarly, the non-life insurance industry is
dominated by a government owned insurance company, i.e., National Insurance
Company, which owns about 10 percent of total assets of the insurance industry. Main
avenues of non-life insurance are automobiles, marine insurance (primarily related to
transportation of goods via sea and the business is directly related to the volume of trade
and terms followed by the importers), fire insurance (linked to the growth of industries
and construction activities) and general insurance of business, etc.

The insurance market is highly concentrated in urban areas with skewed ownership
structure, even of the private companies. Many insurance companies are subsidiaries of
41
large industrial groups that were created mainly to reduce the outflow of funds in the
form of premiums, to manage the risks of these industries and to generate profits out of it.

The demand for insurance depends on real incomes, preference about the need for
financial security, and the prevailing economic environment (interest rates, inflation and
insurance premium rates). Cultural and religious values also have a strong affect on the
insurance business. In Pakistan, per capita income is low and two third of the population
lives in rural areas, the insurance industry has not been able to create sizeable demand.
Thus, the size/penetration of insurance industry is relatively small in proportion to the
GDP (about 0.5%). These inhibiting factors are more pronounced in NWFP. However,
some lines of insurance have performed better in recent years, including auto insurance
due to availability of car financing schemes from banks and leasing companies and
marine insurance with an increase in foreign trade.

Presently, 54 insurance companies operate in Pakistan, out of which 49 companies offer
non-life insurance and 5 offer life insurance services. The non-life insurance industry also
includes six companies that also provide health insurance coverage. The number of active
insurance companies in NWFP is 25-30. SLIC has the most extensive out reach in NWFP
among the insurance companies; the corporation has 26 branches and covers the whole of
prince through an elaborate network of agents. In 2004, SLIC paid Rs 94 per Rs 1,000 of
the sum insured and collected Rs 359 million in premium which were growing at about
18.3 percent per annum over the last three years.

The State Life Insurance Corporation

Currently there are only five life insurance companies operating in Pakistan. The State
Life insurance Corporation (SLIC) is the largest life insurance company in Pakistan. This
company was established in 1972. The share of this companys assets in the total assets
of insurance companies is 70 percent. However, because of the increase in the number of
private life insurance companies, the share of State Life Insurance Company is declining.
The share of gross premium of Life Insurance Company in all Life Insurance companies
is nearly 82 percent. This company has 26 branches in Pakistan; 3 of which are in NWFP.
The number of life insurance policies sold in NWFP has increased from 6,816 in 2002 to
8,635 in 2004.The gross premium has grown by 13 percent per annum during 2001-04.
The amount of gross premium is 3 percent of the total amount of gross value of policies
of this company.

The ratio of first year premium to total gross premiums indicates the growth of the life
insurance business. For all Pakistan, this ratio shows an increasing trend for the State Life
Insurance Company. The ratio of second year renewal to gross premium shows the
willingness of policyholders to keep their policies intact. This ratio has increased from
6.2 to 8.4 during 2001 and 2003.

A bright future of life insurance business in NWFP is anticipated by the industry. The
industry identifies the following issues that need to be addressed to promote the business
42
of life insurance in NWFP. These deal more with changing the perceptions of the people
than with other constraints:

Insurance business is considered as non-compliant with the Islamic Laws.
Lack of awareness among people about the life insurance business.
Less exposure in media
Bad image of insurance agents

To address these issues, the following suggestions have been made by the industry:

There is a need to bring insurance business in conformity with Islamic laws. For
this, investments should be made Shariah complaint. The profit credited to the
policy holders should be truly based on the said investments.
There is a need to create awareness of the insurance business among people. In
this regard, the media can play a positive role.

Issues and Concerns

The insurance industry has good prospects in NWFP but faces certain constraints. People
lack awareness on insurance options; they cannot differentiate between banks and
insurance. The media coverage of the insurance industry is inadequate. In NWFP, people
are more interested in maturity/surrendered values rather in the insurance values in case
of contingencies. Insurance policies are resisted at times on religious grounds. The
industry also needs more committed people with good image.

Suggestions

There is great need for creating awareness through mass media and other means.
Insurance can be made Islam compliant by investing the premiums in Shariah compliant
instruments, and the insured can be given access to information to confirm this. The
government should regulate the industry, through an arm-length through the SECP, and
not interfere in day today operations, staffing, etc.



Government Saving Organizations

National Savings Organization (NSO), an attached department of Ministry of Finance,
mobilizes public savings under prize bonds and other saving schemes for budgetary
support. The outstanding amount in National Saving Schemes (NSSs) was about a trillion
rupees or about 60 percent of the domestic debt as of end-June 2004. The NSO operates
366 National Savings Centres, of which 58 Centres (15.8%) are in NWFP.

The saving instruments take the forms of certificates and accounts. While the saving
accounts are held at Centres, Pakistan Post Office and many banks sell/buy certificates on
behalf of NSO. Defense Saving Certificates (DSCs) and Special Saving Certificates
43
(SSCs) have been the most popular schemes which used to pay lucrative rates of return
(19% p.a.). These two schemes accounted for 60 percent of investment in NSSs in FY
2004. These schemes are briefly described below.

Prize bonds are bearer type instruments available in the denomination of Rs. 200, Rs.
750, Rs. 1,500, Rs. 7,500, Rs. 15,000 and Rs. 40,000. No fixed return is paid but prize
draws are held on quarterly basis. These bonds pay out prizes of various denominations
four times a year. National Prize Bonds account for 15.5 percent share in NSS. With the
profit rates rationalization on NSS, the payout rate on prize bonds has been reduced to 5
percent per annum.

Defense Savings Certificate scheme was inititated in the year 1966 to meet the
requirements of long term savers. The maturity period is 10 years with built in feature of
automatic reinvestment after the maturity. These certificates are available in the various
denominations. The scheme has been very popular since it was safe, tax-free and paid
handsomely.The return has been slashed to from 19 percent to 8 percent per annum and
made subject to a withholding tax of 10 percent. The net investment in these certificates
has declined from Rs. 10.44 billion to Rs 10.29 billion during 2001 to 2003. This
declined has observed more pronounced in NWFP. The amount invested in these
certificates in NWFP has fallen from Rs 685 million to Rs 264 million. However the
share of NWFPs investment remained fluctuated around 6 percent.

Special Savings Certificates, both in fixed denomination certificates and accounts, was
designed for shorter tem savers. The maturity period is three years, profits are paid six
monthly, and profit rate is 6.9 percent per annum for the first 2.5 years and 7.8 percent
per annum for the last six months. Again, the certificates are available in various
denominations. In case, the profit earned on these certificates is not drawn on due date,
the profit not drawn automatically stands reinvested. The return on certificates is subject
to zakat and income tax withholding. The average profit rate has declined from 11.43
percent in 2001 to 7.53 percent in 2004. In NWFP, the net investment in these certificates
has declined drastically in 2004 (from Rs 1,844 million in 2003 to Rs 102 million in
2004).

Regular Income Certificates like DSC paid high return and was very popular. It has been
designed to meet the saving requirements of pensioners, widows, orphans etc. Profit
amount is payable on monthly basis, and the certificates are available in various
denominations. The certificates are exempt from zakat but subject to income tax
withholding. Net investment on regular income certificate increased from Rs billion in
2000-01 to Rs billion in 2001-02 and turned negative in 2002-03. similar trend has been
found in NWFP. The main reason of this decline is reduction in the annual profit rate
from 12.48 percent to 9.84 percent in 2002-03 and a further decline to 7.32 in 2002-03.

Mahana Amdani Account is scheme for small savers. A monthly saving up to Rs 5,000
for 84 months generates a permanent income of that amount per month till the currency
of the account. Net investment in this account shows an increasing trend in Pakistan as
well as in NWFP during 2001-2004.
44

Saving Account is like a bank saving account with some restrictions on the number of
withdrawals. Withholding income tax and zakat are levied. However, unlike ordinary
bank account checks, the withdrawal slips of a Saving Account are not negotiable. Net
investment in this account was negative until 2001-02 in Pakistan. Similar trend has been
noted for NWFP.

Post Office

Pak Post has extensive outreach with a total of 13,000 post offices (POs), of these 9,500
are in villages. This outreach is better in NWFP; roughly 17 percent of POs are located in
this province. In addition to postal services, Pak Post also prides financial services in the
form of saving accounts, life insurance and remittances.

Pak Post Saving Bank offers the largest network of savings bank services in Pakistan,
serving as an agent of Ministry of Finance. The POs have 87 billion rupees in its saving
accounts. Their saving bank services are not only popular, but are predominantly the only
banking services available in remote rural areas. The Pak Post Saving Bank offers the
following services
.
All saving services of the NSO
Post Office Saving Account is comparable to the saving account of NSO, with
additional facility of easy and simple transfer of the Account to any Post Office
branch in the country.
Savings Bank Mobile Account facility ensures safety in handling of money from
one city to another. The minimum account balance requirement is Rs. 2,000 and
the account holder can withdraw 75 percent of the whole deposit in any GPO. The
Account is thus safe and reliable, guards against risk in handling cash during
travel and deposits earn profit
Postal Giro Service extends facility for transfer and circulation of money/funds
among different accounts without handing cash physically. The service can be
used to pay utility bills and other outstanding payments through post office.

The amount in saving schemes of the Pakistan Post has declined during last four years in
Pakistan as well as in NWFP. However, deposit amount in the Special Saving Accounts
and Post Office Saving accounts has increased. The amount in the Saving bank Mobile
Account and Postal Giro Sevice also shows a declining trend in last four years.

Postal life insurance is the oldest institution and collected premiums are invested in Post
Office Insurance Fund, which is controlled by the Ministry of Finance. The Fund gets
accretions from the Ministry at the prevailing rates of return on government instruments.
This policy ensures security of fund, attractive return and increased public confidence.
Postal Life Insurance is available in the rural areas due to extensive network of post
offices, and offers a reasonably wide range of insurance options. Pak Post also provides
limited non-life insurance of letter, parcels, etc. In 2004, Rs 181 million were collected as
Postal life insurance premium; 13 percent of this amount was collected from NWFP.
45

Pak Post also offers secure and cheap remittance services. The most popular service is
money order. Pak Post also offers postal order service, which is designed to fulfill
requirements for small remittances at nominal commission. It has introduced fax money
order service at district GPO's and other large post offices, realizing customer need for
speedy remittances. Pak Post has also launched a fast and cheaper postal draft service for
remitting money like banks to cater for the needs of urban population. In 2003, 5 millions
money orders and 0.8 million postal orders were issued in Pakistan. On the other hand, 4
million money orders and 0.5 million postal orders were paid in Pakistan. The data shows
that postal orders are the common mode of sending money and money orders are more
frequently used for receiving money in NWFP [see table 5.3]. In addition, Rs 1,272
million were transferred through 0.4 million urgent money orders and Rs 1,911 were
through 0.2 million fax money order in 2003. The average amount transferred through
fax money orders in NWFP was Rs 8,890. Money orders are the main source of
commission earning for Pakistan Post followed by fax money orders and urgent money
orders. Postal orders are used to remit smaller amounts at nominal charges. The average
amount per postal order was Rs 29 and average amount received per postal order was Rs
37 in 2003.

Table 5.3 Percentage distribution of money transferred through post office by provinces
(2002-2003)
Punjab Sindh NWFP Balochistan
AJK and
Islamabad
All
Pakistan
Money orders
issued % % % % % (million)
# 49.95 27.96 9.77 6.21 6.12 5
Value 44.88 36.08 7.20 6.47 5.37 13,617
Commission 49.26 31.82 7.28 6.38 5.26 149
Money orders paid
# 64.29 11.18 15.67 1.23 7.63 4
Value 65.84 9.99 16.09 0.99 7.08 13,814
Commission
Postal orders issued
# 32.55 47.87 12.77 1.40 5.42 776,188
Value 48.94 27.43 13.49 2.32 7.81 22
Commission 49.65 33.56 7.26 1.85 7.69 3
Postal orders paid
# 52.51 23.50 6.81 1.80 15.37 455,477
Value 44.34 27.18 6.77 2.07 19.63 17
Commission
Urgent money order
# 30.83 3.30 4.45 57.25 5.37 415,368
Value 43.07 4.08 3.48 43.18 6.10 1,272
Commission 47.22 4.66 4.08 36.70 63.25 14
Fax money order
# 19.14 11.12 4.70 58.89 6.14 231,684
Value 22.00 10.68 5.02 56.08 6.21 1,911
Commission 20.81 11.55 2.64 58.99 6.00 28
Source: Pakistan Post Annual Report (2002-03)
46

In addition, Pak Post collects utility bills. The number of utility bills collected by the
Pakistan Post in NWFP has grown by 19 percent in last four years. The commission
earned under this head has increased to Rs 8 million in 2004 from Rs 4 million in 2001.
Pakistan Post prints and sells Pakistan Highway Code Book and Agricultural Loan Pass
Books since 1973 and 1978 respectively. The number of Agricultural Loan Pass Books
sold in NWFP has increased from 15,993 in 2001 to 38,259 in 2004. Pakistan Post also
serves as an agent of federal/provincial government for payment of pensions, collection
of taxes (custom/sales tax on incoming foreign parcels, motor vehicle tax, stamps, and
driving/arms license fees), and disbursement of financial assistance (zakat, etc.) to the
needy.

Pak Post has been looking for alliances to expand the scope of its services. Thus, it has
arrangements with the DHL for parcel delivery and Western Union for money transfers,
and is negotiating with the Khushhali Bank to act as an intermediary for MF. But on the
whole, the Pak Post network remains underutilized, and POs can easily work as agents to
other financial institutions in rural, remote areas.

Issues and Concerns

NSSs have recorded a net outflow of funds in the past few years due to sharp reductions
in profit rates on these schemes. The rates for some vulnerable groups are set higher but
only marginally. This outflow has also had a depressing effect on bank deposit and
lending rates, which reportedly benefited the growth of the corporate sector. However,
access of savers in these schemes has been reduced.

47
Chapter 6
Micro-credit

In recent years microfinance has become a powerful tool of poverty alleviation that
empowers individuals through sustainable livelihood. Although Europe is the origin of
microfinance but in recent years 76 percent of total micro loans are in Asia, followed by
Latin America (21%) and Africa (3%) [Khandkar (1999)]. During the 1980s institutions
such as Grameen Bank in Bangladesh and Bank Rakyat in Indonesia (BRI) emerged as
poverty targeting Micro-Finance Institutions (MFIs). These institutions have adopted an
empowerment approach to credit delivery. Various MFIs around the world have learned
from their experiences. Since then, MFIs have received both cynicism and accolades in
the development discourse as empowerment tools especially for rural women.

In Pakistan, informal moneylenders are the main source of credit to a larger proportion of
population in rural areas. The Pakistan Rural Household Survey (2001) conducted in
selected districts of all provinces of Pakistan noted the dominant role of informal lenders
in rural credit market7; the high share of Agricultural Development Bank of Pakistan,
now Zarai Taraqiati Bank Limited, (88%) in formal loans; and the dominance of friends
and relatives (61%) in informal lending The share of shopkeepers and landlords was also
found significant (18% and 16%, respectively) [see World Bank (2002)].

In Pakistan, the microfinance sector is in the initial stages of development. Three
different types of institutions are involved in the service delivery of credit to the needy.
These include: Specialized Micro Finance Institutions (MFIs) including Commercial
Banks; Rural Support Programs; and NGO Micro Finance Institutions.

Specialized Micro-Finance Institutions:

Khushali Bank, First Micro Finance Bank and SME Bank are the specialized Micro
Finance Institutions, set up by the Government of Pakistan in 2000, 2001 and 2002,
respectively. In addition, the Bank of Khyber is another important financial institution
that extends micro loans in NWFP.

Khushali Bank

Khushali Bank aims to promote self-employment. This bank provides loans up to
Rs.30,000 to poor people to set up their own businesses. The banks social sector services
package includes women development, capacity building services for skill development
and the provision of basic infrastructure services as health, education, drinking water,
sanitation and communication etc. Up to March 2004, the bank had disbursed loans
amounting to Rs 2.135 billion to 210,784 people. Women constitute 35 percent of the
Banks clients. Nearly 80 percent of the lending activity remains in the rural areas and 20

7 Only 8 percent households borrowed from the formal sources of credit during 2001.
48
percent in urban areas. The Bank plans to access over 56,000 more people by the year
2006 [Pakistan Economic Survey (2003-04)].

Currently, Khushali bank is working in six districts of NWFP. This is the lead
microfinance institution in the country. Main function of this bank is lending. Other
commercial banking will start soon. Main focus of its lending is to promote small
businesses. Khushali Bank extends loans for agriculture, livestock and small businesses.
Most of the loans are granted in the forms of group lending and social collateral is the
main security. Size of loan is from Rs 3,000 to Rs 10,000 with a declining balance
interest rate of 20 percent. Target group of this bank is needy people defined as those
whose annual income is less than the taxable income. Loan periodicity is one year.
Recovery rate is 97 percent with a 60 percent proportion of repeat loans. Loan
applications are provided and filled at the door step of the needy. National Identity Card,
proof of membership of an organization, and previous credit history are the major
documents required to accept or reject a loan application. Application processing time
after complete documentation is 5 to 10 days.

Access to remote areas and religious factors relating to interest are the major constraints
that bank is facing.

First Micro Finance Bank

The main objective of the First Micro Finance Bank is to provide financial services to the
needy, especially to the women, in urban as well as in rural areas. This bank is not
operational in NWFP as yet.

Small & Medium Enterprise (SME) Bank

Small and Medium Enterprise (SME) Bank was established on January 1, 2002 by
merging Small Business Finance Corporation (SBFC) and Regional Development
Finance Corporation (RDFC). The bank has an exclusive mandate to provide financial
services to the SME sector. SME bank serves all those businesses that have fixed assets
of less than Rs.100 million (excluding cost of land and building). The bank extends
services for two types of schemes: program lending scheme and project lending scheme.
Under the program lending scheme, a specific sector with a large SME presence is
identified and a lending scheme is designed according to the sector requirements. The
repayment period is determined by the nature of the scheme and linked to its cash flow.
The Project Lending Scheme caters to those enterprises, which are commercially viable.
Any profitable running business can qualify for banks financing. The eligible applicant
should have at least two years of relevant experience for applying to the program lending
scheme. Credit under these schemes is repayable over a maximum period of seven years.
The mark up rate is 16 to 18 percent for both categories. The financing limit ranges from
Rs. 50, 000 to Rs. 30 million. The bank demands traditional collateral and security
including mortgage of land, building or house and hypothecation of stocks and
equipment. Guarantees of reputed persons, trade bodies and corporate bodies are
49
acceptable for loans up to Rs.100, 000. This bank has not yet started its operations in
NWFP.

Cooperative Lending

The total number of Co operative Societies in the NWFP is 8,434, of which 8,127 are
agricultural. cooperative societies. The provincial Co Op bank is in the process of
liquidation since 2001. Outstanding Cooperative Bank loans amount to over 303 million
rupees, of which the principal amounts to 201 million rupees and the is the mark up. The
loans from the Cooperative Bank were much cheaper, with 3-4 percent points less mark
up than that of the ZTBL. Last loaning by the Provincial Cooperative Bank was in 1995.
Currently, the main emphasis is on recovery of loans. Some of the loans are outstanding
since 1977. Procedural problems involved and the discontinuation of loans has also added
to the problem. The withdrawal of certain powers of recovery as announced in the Kissan
Package is also hindering loans recovery. Local traditions and culture also hinder the
sale of mortgaged property for recovery of loans. The writ of the government has also
weakened overtime and added to the problem. Politically motivated government policy
pronouncements have also not helped in this context.

Rural Support Programs (RSP)

The RSPs are one of the pioneering initiatives undertaken in Pakistan for micro-credit
schemes to the poor. The RSPs function on the basis of a community model which uses
the Community Organization forum for delivering credit. The National Rural Support
Program (NRSP) was set up in November 1991 as a non-profit organization to undertake
development activities in the rural areas of Pakistan. It is working in the federal capital
and in 27 districts of all the four provinces and Azad Kashmir. In NWFP it operates in
Malakand and Mardan districts.

Sarhad Rural Support Program (SRSP)

Sarhad Rural Support Program (SRSP) was set up in 1989. Its main areas of operation are
education, health care, microfinance and community development. According to Pakistan
Microfinance Network, total number of active SRSP borrowers was 6,389 in 2003.
Nearly 33 percent of the total borrowers were females. SRSP provides saving services to
151,500 individuals with deposits amounting to Rs 69 million. The average saving per
saver was Rs 457. Total loan portfolio was Rs 44 million with average loan size of Rs
6,849. SRSP is now operating in 11 districts of NWFP with coverage of 2,755 villages8.
Fifty two percent of the households in these villages are covered by the SRSP. There are
nearly 30 percent females among the total staff of 480.


8 We are extremely grateful of Mr. Wasiq Ali Khan, Programme Manger, Microfinance, SRSP for
providing the necessary information on which this section is based.
50
Maximum duration of SRSP loans is 1 year
9
and maximum amount is Rs 20,000. Number
of borrowers has increased by 16 percent during 2001-2004 [see table 6.1]. The
proportion of female borrowers has increased from 18 percent to 21 percent during this
period
10
. Average loan was Rs 7,995 in 2001 and that has increased to Rs 8,127 in 2004.
Up to 2002, the annual mark up rate was 20 percent on declining balance. Since then, a
flat rate of 10 percent is used. An improvement in the recovery rate has also been
observed during this period. In 2004, the recovery rate was 91 percent.

Table 6.1: Lending Operations of SRSP
2001 2002 2003 2004
Loans up to 1 year

Number of borrowers in NWFP
10,257 10,879 11,854 12,181

Proportion of female borrowers (%)
18 19 20 21

Average loan size (Rs)
7,995 8,273 8,099 8,127

Average mark up rate (%)
20 20 20 10
Loans more than 1 year

Number of borrowers in NWFP
6,157 7,348 8,145

Number of female borrowers in NWFP
39 38 39

Amount of loan in NWFP (million Rs)
19,815 16,603 14,979

Average mark up rate (%)
20 20 20
Recovery rate 86 87 90 91
Source: Based on the data provided by the SRSP

Most of the long term loans (that are now discontinued) were the livestock loans.
Currently, almost all of the loans are given for small business activity.

SRSP requires three types of documents to open an account. These are identification,
proof of membership of a development group, and/or a reference letter from the
chairperson of a development group. Although lending operations are very simple but it
is compulsory for the loan applicant to be a member of a development group
11
. Loan
applications are collected from door steps of the loan applicant and this application is
processed in the regional office. Previous credit history, size of loan and
employment/income history are important factors in making decision about a loan
application. A loan application is processed in 15 days. Service charges are applicable to
process a loan application. These charges vary in the range of 0 to 12 percent. In case of
default, a penalty of Rs 100 for a loan of Rs 10,000 with a grace period of maximum 15
days is levied.

In addition to its regular services in 11 districts, SRSP is slated to play a crucial role in
the implementation of Barani Area Development Project Phase II.



9 SRSP discontinued the loans of duration more than 1 year after 2003. Amount of each such loans was
more than Rs 20,000.
10 It is interesting to note that the number of female borrowers was 39 percent for the loans of more than
one year duration.
11 Current membership of SRSP is 199,785
51
Issues with the Microcredit sector of the Rural Financial Market in NWFP:

Most of the rural population in NWFP is engaged either in small-scale agriculture or
agriculture related activities and are generally poorer than their urban counterparts. The
inherit impediments to efficient market include:

Low population density, small average loans, and low household savings
increases the transaction costs per monetary unit of any financial intermediation.
Poor infrastructure, limited social services like education and health, and low
integration with complementary markets results in high fragmented financial
markets that involve: a) high cost of overcoming information barriers, and b)
limited risk diversification opportunities.
Seasonality of agricultural production and sensitivity to natural disasters heighten
the probability of covariant risks (in prices and yields) affecting clients incomes
and add to the cost of rural financial intermediation.

For these reasons, formal financial institutions have largely avoided serving rural areas.
Consequently, most micro-entrepreneurs are dependent on self-finance or very costly
short-term credit from money lenders which limits their ability to actively benefit from
investment opportunities and contribute to economic growth.

The Government of the NWFP as represented by the Additional Secretary Agriculture
sees the following issues with Microfinance in the Agriculture sector:

Small and marginal farmers are not the main beneficiaries of ZTBL loans,
which are generally mis-utilized.
Lack of awareness about various loans is also a problem
Timely availability of credit and inputs are major problems in the NWFP
Poor infrastructure increases the transaction costs of inputs and outputs
and also impacts on the quality of the produce.
Low capacity of the farmers to purchase costly inputs.
Population is conservative in its outlook and with a religious background
unwilling to accept interest related loans. Interest should be replaced by
service charges.
Passbook remains a problem for the farmer. Lengthy and complicated
procedure discourages the farmers. Farmers with passbook have higher
default rates.
One window operation of ZTBL is not effective in the NWFP as officials
of the Revenue Department do not cooperate. Malpractices of ZTBL
officials are also alleged.
Disbursement of loans in NWFP is much less than the allocation

Fulfilling documentation requirements is the major problem in obtaining loans. Small and
marginal farmers are unable to avail farm loans because of this. Similarly the poor are
handicapped in their access to loans because of lengthy procedures leading to large
implict and explicit transaction costs.
52

Suggestions for Improvement

Awareness creation through social mobilization is a must. In this regard, it is
suggested to identify rural poor in the form of a group (based on
mohallah/village/UC). These groups serve as vehicles for building the self help
capacity and potential of communities.
Organizations should be recognized the driving force behind identifying and
undertaking a variety of diverse development projects, such as, microfinance,
infrastructure development, natural resource management, enterprise promotion
and social development.
Government should provide all kinds of support to these institutions in the form
of making long term investment, especially those who have massive outreach.

[Sohail, I guess this requires some re-working]

Pakistan Poverty Alleviation Fund (PPAF)NGO Micro Finance Institutions:

In order to enhance the access of the poorer households and communities to socio-
economic services and hence their empowerment, the Government of Pakistan set up the
Pakistan Poverty Alleviation Fund (PPAF) in February 1997. PPAF funds for income
generation activities and improved community physical infrastructure are disbursed
through its three main units 1) Credit and Enterprise Development Unit; 2) Community
Physical Infrastructure Unit; and 3) Human and Institutional Development Unit. PPAF
aims to reach the poor and disadvantaged communities in both rural and urban areas
through NGOs and the Community Based Organizations (CBOs).

The Pakistan Microfinance Network (PMN) is the representative body of MFIs in
Pakistan that includes formal sector financial institutions, NGOs and RSPs. According to
PMN, nearly 5.6 million individuals of Pakistan are in need of credit services. However,
the outreach of present services fulfils the needs of only 1 percent.

According to the Annual Report of PPAF (2004), micro-credit loans of PPAF have
increased from Rs. 35.6 million to Rs. 2,814 million from FY 2000 to FY 2003. The bulk
of the micro credit is disbursed under the Credit and Enterprise Development Unit with
disbursements in FY 2003 of Rs 1,314 million, 47 percent of the total PPAF
disbursement. This amount was equivalent to 4.8 percent of the total institutional loans
disbursed during that year. In 2003, 119,196 borrowers received an average loan of Rs.
8,816. Nearly 44 percent loans went to women. Most of the loans (38%) were disbursed
for livestock, followed by agriculture (32%), and enterprise development and commerce
and trade (30%).





53
Sungi Development Foundation

Sungi Development Foundation is the major NGO working in NWFP with an aim of
credit systems for poverty alleviation. This organization was established in 1993. It has 6
branches in NWFP.

Table 6.2: Lending and Saving Services of Sungi Development Foundation
2000 2001 2002 2003
Total no. of active savers 2,057 8,713 10,739 12,985
No. of active female savers 5,857 4,333 5,271 5,876
Cumulative amount saved - Rs. (000) 6,023 7,718 92,255
Average savings - Rs. 2,929 719 7,105

No of active loans 1,262 1,736 1,484 1,033
Loans disbursed during the period Rs (000) 6,797 6,190 5,068 3,869
No. of borrowers 1,853 543 441 1,033
No of female borrowers 465

Portfolio at risk at the end of the period Rs (000) 620 2,206 6,381
Loans written off Rs (000) 444
Source: PMN (2000, 2001, 2002, 2003)

Sungi provides savings as well as lending services. The number of active savers increased
from 2,057 to 12,985 during 2000-2003.[Table 5.2]. This led to an increase in the amount
saved with Sungi from Rs 6,0231 to Rs 92,255. On the other hand, the number of active
loans shows a declining trend. This caused a decline in the gross loan portfolio. In 2003,
average size of loan declined to Rs 3,745 as compared to Rs 5,386 in 2000. Portfolio at
risk has increased from Rs 620 thousand to Rs 6,381 thousand during 2000-2003. This
indicates problems in loan recovery. Operating expenses of this NGO are showing an
increasing trend. This deterioration is negatively affecting the operating efficiency and
staff productivity. In 2003, loans amounting Rs 444,075 were written off by Sungi.

Microfinance and Governments Projects

In addition to these institutions, microfinance service is also extended by donor funded
government programs, such as, Barani Area Development Program, Malakand Rural
Development Program and Dir Area Support Program. Bank of Khyber was the major
implementing partner in the first phase of Barani Area Development Project. In the
second phase, SRSP is going to be the major partner for social mobilization and credit
disbursement will be done through Khushali Bank and PPAF. The economic base of the
NWFP is agrarian; with 83 percent of the population living in rural areas. Population
pressure on land and related resources, as reflected in the density of population - 238
people per square kilometer (the 2
nd
highest in the country) - is quite high. The per capita
availability of arable land in the province is extremely small, only 0.23 acres against 3.66
acres at the national level and 0.36 acres in the Punjab.

Small farms dominate the structure of land holdings in the NWFP. About 79 percent of
the total farms in e operate less than 5 acres. These farms account for 32 percent of the
54
farm area, 37 percent of the cultivated and 42 percent of the cropped area. These farmers
often lack the requisite collateral and the necessary clout to borrow from the formal
/commercial banks. These farmers producing under investment constraints often indulge
in distress sales at harvest time, when the output prices are at their lowest ebb, to meet
their pressing requirements of cash.

The farmers are also not quite well versed with the formalities of commercial banks,
which have only recently started lending for farming operations. The small and marginal
farms face numerous production and marketing constraints and operate under difficult
circumstances. They account for 41 percent of the wheat area, 38 percent of rice, 54
percent of maize, 34 percent of oilseeds, 36 percent of sugarcane, and 40 percent of the
fodders acreage in the province. Thus, these farms make significant contribution to the
farm production and the provincial economy. Nevertheless, small farmers are
handicapped in their access to technology, often for want of resources and have limited
capacity for risk. They are more vulnerable to suffer production losses during periods of
drought, floods, bad weather. They are also more prone to suffer high input prices during
periods of input shortages and also experience low output prices at harvest time because
of lack of storage facilities and limited capacity to hold on to their marketable surplus in
the hope of better prices later. In years of good harvest, often accompanied with low
output prices (situations of market failure), they may suffer even lower incomes.

The development of microfinance institutions offer a ray of hope to these small and
marginal farmers. However, this requires an analysis and understanding of the
requirements and demands of the types of the financial services the poor need.
Microfinance is being recognized the world over as a viable business. The experience in
other countries however suggests that success is predicated on a mutually reinforcing fit
between the larger financial environments, the design of service and delivery and the
particular needs of the poor that microfinance institutions tend to serve.

Most of the small and marginal farmers on account of their inadequate access to
technology and resources are vulnerable to income shocks, poverty and food insecurity.
Raising productivity of small farmers holds the key to improving their incomes and well-
being. In this context it is imperative to increase their productivity, which requires
investment in modern inputs and human capital. To remove resource constraints of the
farmers the commercial banks and ZTBL have been assigned higher targets for providing
production loans to the extent of around Rs.100 billion or so. In addition, the government
is encouraging the network of microfinance institutions and NGOs to provide small loans
and technical guidance to small and marginal farmers.

To ascertain the situation on the ground and assess the supply and demand side issues
relating to microfinance in the NWFP meetings were held with the SRSP, NRSP,
Officials of Dir Area Support Program and the Barani Areas Project. In addition Focus
Group Discussions with farmers and representatives of commerce and trade, NGOs and
financial institutions in these project areas were held.

55
Microfinance as discussed in the literature includes the provision of credit, promoting
savings, insurance services, etc. However, in the NWFP microfinance invariably
means provision of credit only. Savings receive only lip service while insurance
facilities are conspicuous by their absence.

Issues and Recommendations

There is an urgent need for training people in the concept and requirements of
microfinance activities as the trained professionals in this field are not available. This
remains a highly labour and skill intensive activity.

The Institute of Bankers should include microfinance in their training programs.

The people in the NWFP are reluctant to borrow from the traditional banks. They
cannot easily meet the documentation requirements. There is relative conservatism
and religious consideration of shunning interest related activities.

There is also a need to streamline procedural formalities and to provide sufficient
funds to concerned agencies with the ultimate aim of reducing transaction costs on
microfinance in the province.

NGOs active in the microfinance business in the NWFP include: Sarhad Rural
Support Program (credit line of Rs. 10 million), SANGI, Swabi Women Welfare
Society, Khwendo Kor and NRSP.[Sohail, this is not a recommendation or an issue.
You may like to delete this or take this somewhere in the main text.]

A re-focusing on micro finance in the banking sector through training, flexibility and
building of trust and through special outreach programs is urgently required.
56
Chapter 7
The Focus Group Discussions

Focus Group Discussions were held in six districts. The districts were selected on the
bases of geographic scatter and a composite ranking based on six key indicators, viz,
infant mortality, primary school enrolment, adult literacy, water and sanitation and
income per day per capita. These rankings came out of the Multiple Indicators Cluster
Survey (MICS) conducted in 2001. The rankings are given in Annexures. Two districts
each were selected from high, medium and low derivation rankings of the districts. The
following districts were selected.

Haripur East of the province; low deprivation
Peshawar Mid-west; low deprivation
Swabi Middle of the province; medium deprivation
Lower Dir North-west; medium deprivation
D.I. Khan Southern most; high deprivation
Lakki Murwat Southern; high deprivation

The groups consisted of small businessmen, industrialists, farmer, microfinance clients,
bankers, elected representatives, government officials and NGOs. The mix varied in each
district. In some districts multiple sessions were organized for practical reasons. Details
of the numbers involved in each district can be seen in Annexure III.

Constraints and Issues

In general, the participants believed that access to financial services has improved over
time but there are some regulations, procedures and policies that negatively affect the
access and effectiveness of financial services.

Agricultural Credit

Passbooks: This basically serves two purposes. It determines the ownership of the land
against which a credit request is made and it is used to determine the credit limit for an
agricultural borrower. This book is prepared by the concerned patwari who also verifies
it whenever it is necessary. Verification of passbook is a common problem in the settled
districts where. A farmer has to make multiple visits and/or offer a backhander (in the
range of 300 to 600 rupees) to speedup the process. The patwari is a low tier revenue
functionary but an authority on land record and holding. The one-window operation of
ZTBL is not working affectively. Patwari often does not show up on marked days. This
needs some enforcement effort. The problem could be also be eased out by accepting
verification for multiple years if a borrower is not in default.

In districts that are not fully settled, like Lower Dir, it is the District Revenue Officer
(DRO) who issues property ownership certificate and a non-encumbrance certificate. The
farmers also complained red tapism at the DRO.
57

Across the board relief packages: The recovery rate of agricultural loans has declined
in recent years. A major factor is the expectation of a relief package. Two consecutive
relief packages were announced over a short span. As a result, the farmers are not paying
back loan in anticipation of another announcement sooner or later. Indiscriminate and
across the board use of relief packages only adds fuel to the fire. Any relief should be left
to the banks to handle. They can get a better deal on case by case basis.

Other non-regulatory interventions: Political intervention, such as the announcement
that police should not hassle defaulters in any case, have affected recovery efforts of the
banks. Such announcements are in a way prejudicial and do cause hardships for the
banks. Recovery becomes even more problematic.

Cost compatibility: Though all farmers commended reduction of the mark up from 14
percent to 9 percent in July 2004, they still feel they are being treated differently relative
to industrial borrowers. This thinking results from a lack of understanding of the banking
operations. Their perception may change with more information and education.

Lack of marketing channels: Production shortages and gluts cause hardships for
farmers. This is one of the reasons for default. In the current marketing framework, the
farmer takes the whole brunt.

Misuse of credit: Some of the defaulting farmers admitted that they defaulted because
of the misuse of credit. A most common misuse is expending the credit money on
daughters marriage. Alternative credit venues are now easily available for meeting such
expenses. May by some guidance by the agriculture credit providers to farmers (in the
shape of a leaflet) can ease the situation.

Business and Industry

Policy shifts: Frequent shifts in policies have hurt investment climate and financing in
NWFP. A classic example of policy shifts is the Gadoon industrial estate. A sudden about
turn in 1998 withdrawal of tax holiday and relief on power tariff - resulted in a collapse
of most industrial units. The policy shift caused closure of four-fifths of the industrial
units, labor lay offs and bad debts that ran in to billion of rupees. The most significant
effect, however, was the shattering of investors confidence. Any policy decision should
be well thought out and must be backed by expert analyses. If a policy needs a revision, it
should require even more rigorous review and analyses. Even rectification of a bad policy
framework must be gradual and must have some room for adjustments to likely affectees.
There is absolutely no hope that some 200 industrial units will now ever be revived.

Running Finance: It is a critical element in smooth running of the businesses and
industrial units. Apparently, only relatively large business houses avail this type of credit
and small businessmen are not even aware of such a service.

58
Imposed scheduling for disbursements by financiers: Lending for new industrial units
is often made contingent on prior utilization of owners equity. Disbursements of
borrowed amount start after full utilization of equity. There are cases where this
requirement delays the completion of the project. For import of machinery, an L/C has to
be opened well in advance of completion of plant building, for example. But inspectors of
the credit sections of the banks would not agree to owners plea and allow disbursements
only on their own terms.

Upfront costs for small borrowers: Initial documentation and insurance costs are on the
high side. On a loan of 50,000 rupees borrowed for running a cloth shop, the initial
documentation was 2.2 percent and upfront insurance premium for two years was 3.2
percent of the borrowed amount. For a small borrower, these are significant costs, which
sometime forestall borrowing.

Decentralization: Lending authority at district level and remote branches is limited. At
places only deposit taking is done. With the passage of time such limits need revision and
scope of services at remote branches should also be enhanced.

SME and trade finance: Classification varies across banks. One commercial bank
classifies an SME as a manufacturing unit with assets equal to or exceeding rupees 100
million and more than 250 employees. For trading, a unit must have an asset worth of 50
million rupees, at least 50 employees and annual sales around 300 million rupees. There
is a need to standardize this classification.

Microfinance

Utilization of project credit funds: A huge resource of the 692 million rupees, available
for microfinance component under the Barani Area Development Project II, has
remained unutilized for quite some time. Negotiations with the earlier partners who
disbursed Barani-I microfinance credit line fell through for practical reasons. Now,
negotiations are on with new potential partners and the likelihood is that these would be
finalized soon. This project is being implemented in 11, mostly deprived, districts of the
NWFP.

Access and coverage: On the supply side, there are many other actors who have excess
liquidity. Despite an easy supply situation, only a limited amount is being utilized and
coverage is a bit scanty. Perhaps reluctance to move fast emanates from recent experience
of a commercial bank which has a huge default on their microfinance portfolio. This
portfolio was more on the conventional mode of small loan financing rather than on
acknowledged best practices of microfinance.

Community Mobilization: Another issue is the slow pace of community mobilization.
This process by its nature is time consuming and requires specialized skills. The NGOs
operating in NWFP are playing their role in a limited way and in limited areas. What is
needed is more expansion of NGO network and their capacity building with right mix of
skills..
59

Standardization: There is a wide variation in MFIs definition of microfinance, approach
and nature of services, procedures, and cost and tariff structures. There are commercial
banks that now provide microfinance of up to 100,000 rupees for petty small businesses
and agricultural activities. Their approach is primarily based on conventional lending
rather than on practices employed for the microfinance. At the moment, such banks are
facing a recovery problem. In general, recovery rate of tiny loans of up to 20,000 is far
better than the higher end of the microfinance level (by SBP definition a loan up to
100,000 rupees). Even well reputed NGOs have faced problems in recovering relatively
larger micro loans and revised their strategies accordingly. Similarly, there are variations
in terms and conditions of MFIs. It is time to do an analysis of all variant factors to see if
there is room for evolving some sort of basic standardized principles in the microfinance
sub-sector.
:
Packaging of microfinance: There are activities that only require microfinance for an
income generating activity at a micro level, but there are a host of micro level enterprises
that require packaging of microfinance with ancillary activities. This includes skills
development and facilitation in developing marketing channels. Some NGOs are already
doing this in a small way and are quite successful. What is needed is to look at the whole
spectrum of micro enterprises and evolve necessary models and modules that suit them.
These would provide basic guiding frameworks in a cost effective way. Not all NGOs
will have to invest in to it.

Sustainability: A huge chunk of microfinance is being pumped through credit lines
available in some area development projects. The microfinance activity comes to a
sudden halt as soon as the project is over. Even recovery of loans becomes a big problem.
The projects provide a necessary cushion to absorb high administrative costs in
administering the microfinance, but there is a need to provide for some post project
avenues (like endowmwnt funds) to ensure sustainability of the microfinance activities

60
Chapter 8
Summary and Conclusions

Scheduled Banks

A broad analysis of institutional, inter-temporal and spatial aspects of the evolution of
access to financial services, based largely on the available data and interactions with FIs
managers reveals the following key points.

Scheduled banks remain the main providers of financial services in NWFP, and in
terms of bank branches, the province is below the national level but better served
than the province of Balochistan.
The aggregate supply of financial services appears to have increased over the past
years despite the contractions in the number of scheduled banks due to mergers
and closure of loss making bank branches.
There has been a significant shift in composition of service providers. With
privatization of banks, the share of private banks has risen sharply in terms of
institutional presence as well as the volume of business.
In line with the national trends, banks are expanding their outreach by issuing new
instruments and technologies like automobile, housing and other consumer
finance, ATMs, credit/debit cards, etc.
Newly chartered private banks have expanded their outreach very fast by opening
branches, issuing new financial instruments and using modern technologies, such
as ATMs, credit/debit cards, Islamic modes of banking, etc. However despite this
expansion, the share of these banks in terms of presence or volume of business
appears very small.
Banks tend to serve the relatively rich people. For all banks taken together, per
capita income tends to be positively associated with broad measures of access
such as density of banking institutions or the volume of loan and deposit services
they provide.
Most of the bank branches are located in Peshawar and central part of NWFP; the
institutional presence in the southern and northern districts is very limited. These
regional differences would further accentuate as the loss making branches of
privatized banks are likely to close.
Regulatory practices of know your client, verification of credit records from
CIB/DataCheck, insurance requirements, reporting requirements and other
documentation, it is felt by the stakeholders, have infringed upon privacy, added
to cost of business and restricted access. Some of these practices need to be
reviewed to create a better balance between business interests and the related
risks.
Some contrasts among the banks are noteworthy. Private and public sector banks
are similar in many respects; both tend to serve richer people and areas; both have
urban bias; and easily substitute each other in thinly populated areas. However,
the new private banks tend to chose better technology and have higher tariff
61
structure, while public banks including the privatized banks have lower tariffs and
better serve the poor.
Agricultural community appears to be inadequately served. Timely availability of
credit and other inputs are major problems of the agriculture sector in the NWFP.
Despite the recent increases in lending to agriculture, the lending level is much
lower (almost one fifth) of the needed/desired level assessed by the stakeholders.
Agriculture has also not received much attention from the GoNWFP; the package
of agricultural credit by the BOK is yet to be decided by the Senior Minister.
There are several reasons for the low level of lending to the agriculture sector.
Some of these are:

o Population is conservative in their outlook and with a religious background
unwilling to accept interest related loans. Replacing interest with service
charges may be an option.
o ZTBL and other commercial bank lending appear to favor larger land
holdings.
o One window operation of ZTBL is not effective in the NWFP as officials of
the Revenue Dept do not cooperate. Malpractices by ZTBL officials also
been alleged. Passbook remains a big problem for the farmers. Lengthy and
complicated procedures discourage farmers from seeking loans. Allocation
of loans in the NWFP is higher but disbursement much smaller.
o Farmers have very low capacity to purchase inputs; prices of inputs have
risen relative to output prices over the past 20 years. Absentee landlords do
not provide inputs to the tenant on time.
o Several factors have adversely affected the viability and credit off-take for
agriculture. Crop prices relative to input prices have fallen. Poor
infrastructure increases the transaction costs of inputs and outputs and
impacts on the quality of the produce. There is no seed industry in the
province. Orchards are primarily owned by landlords/ Khans, and tenant
works in the orchard as a worker and do not share the income/production
from the orchard.
o Similarly credit needs of non-agricultural rural segments appear to remain
underserved.

There have been some expansions of new service delivery points, and growth of some
institutions, including the new private banks, insurance companies, leasing companies.
However, scheduled banks still account for the predominant share of the financial sector
in the NWFP.

Non Bank Financial Institutions


NBFIs are important for meeting the demands of underserved sectors, but as seen above,
their institutional presence is thin and the operation level very low in NWFP. Several
reasons of this low access to NBFIs can be given. The generic reasons are institutional
from bigger players in banks, weak public commitment and support, and regulatory
62
weaknesses in defining and implanting institutional specific mandates. The information
on regional/provincial economy is very poor, and it is difficult for private parties to gauge
the market potential of a specific segment/instrument/vehicle. Masses are illiterate, and
religious and cultural values militate against interest based instruments, and the poor law
and order situation inhibit outside influences. Further more, regulatory practices of equity
capital requirements, management governance structures and reporting and other
transparency structures have become more stringent. These market uncertainties, more
stringent practices and declining role of public sector institutions have hindered
expansion of NBFIs operations in NWFP

Insurance Sector

The insurance industry has a good prospect in NWFP but faces some constraints. People
lack awareness on insurance options; they cannot differentiate between banks and
insurance. The media coverage of the insurance industry is inadequate. In NWFP, people
are more interested in maturity/surrendered values rather in the insurance values in case
of contingencies. Insurance policies are resisted at times on religious grounds. The
industry also needs more committed people with good image.

There is great need for creating awareness through mass media and other means.
Insurance can be made Islam compliant by investing the premiums in Shariah compliant
instruments, and the insured can be given access to information to confirm this. The
government should regulate the industry, through an arm-length through the SECP, and
not interfere in day today operations, staffing, etc.

National Saving Schemes

NSSs have recorded a net outflow of funds in the past few years due to sharp reductions
in profit rates on these schemes. The rates for some vulnerable groups are set higher but
only marginally. This outflow has also had a depressing effect on bank deposit and
lending rates, which reportedly benefited the growth of the corporate sector. However,
access of savers in these schemes has been reduced.

Post Office

Pak Post has been looking for alliances to expand the scope of its services. Thus it has
arrangements with the DHL for parcel delivery and Western Union for money transfers,
and is negotiating with the Khushhali Bank to act as an intermediary for MF. But on the
whole, the Pak Post network remains underutilized, and POs can easily work as agents to
other financial institutions in rural, remote areas.

Micro-credit sector:

Most of the rural population in NWFP is engaged either in small-scale agriculture or
agriculture related activities and are generally poorer than their urban counterparts. The
inherit impediments, however, to efficient market include:
63

Low population density, small average loans, and low household savings
increases the transaction costs per monetary unit of any financial intermediation.
Poor infrastructure, limited social services like education and health, and low
integration with complementary markets results in high fragmented financial
markets that involve: a) high cost of overcoming information barriers, and b)
limited risk diversification opportunities.
Seasonality of agricultural production and sensitivity to natural disasters heighten
the probability of covariant risks (in prices and yields) affecting clients incomes
and add to the cost of rural financial intermediation.

For these reasons, formal financial institutions have largely avoided serving rural areas.
Consequently, most micro-entrepreneurs are dependent on self-finance or very costly
short-term credit from money lenders which limits their ability to actively benefit from
investment opportunities and contribute to economic growth.

The Government of the NWFP as represented by the Additional Secretary Agriculture
sees the following issues with Microfinance in the Agriculture sector:

Small and marginal farmers are not the main beneficiaries of ZTBL loans,
which are generally mis-utilized.
Lack of awareness about various loans is also a problem
Timely availability of credit and inputs are major problems in the NWFP
Poor infrastructure increases the transaction costs of inputs and outputs
and also impacts on the quality of the produce.
Low capacity of the farmers to purchase costly inputs.
Population conservative in their outlook and with a religious background
unwilling to accept interest related loans. Replace interest with service
charges.
Passbook remains a problem for the farmer. Lengthy and complicated
procedure discourages the farmers. Farmers with passbook also reported to
be having higher default rates.
One window operation of ZTB not effective in the NWFP as officials of
the Revenue Dept do not cooperate. Malpractices of ZTBL officials also
alleged.
Allocation of loans in the NWFP is higher but actual disbursement much
less

Fulfilling documentation requirements is the major problem in obtaining loans. Small and
marginal farmers are unable to avail farm loans because of this. Similarly the poor are
handicapped in their access to loans because of lengthy procedures leading to large
transaction costs both implicit and explicit. There is a need to remove any implicit or
explicit subsidies to the non-agricultural sector the feelings of discrimination that the
rural/agricultural community feels presently. and pleaded for simplifying the formalities
and processes

64
Suggestions for Improvement include:

Awareness creation through social mobilization is must. In this regard, it is
suggested to identify rural poor in the form of a group (based on
mohallah/village/UC). These groups serve as vehicles for building the self help
capacity and potential of communities.
Organizations shall be recognized the driving force behind identifying and
undertaking a variety of diverse development projects, such as, microfinance,
infrastructure development, natural resource management, enterprise promotion
and social development.
Government part should provide all kinds of support to these institutions in the
form of making long term investment, especially those who has massive outreach.


Microfinance and the Government Sector

There is an:

An urgent need for training people in the concept and requirements of micro finance
activities as the trained professionals in this field are not available. This remains a
highly labour and skill intensive activity.

The Institute of Bankers should include microfinance in their training programs.

The people in the NWFP are reluctant to borrow from the traditional banks. There is a
problem of meeting documentation requirements besides conservatism and religious
consideration of shunning interest related activities. This problem is made complex
by the lending of insufficient amounts to match the borrowers requirements.

There is also a need for streamlining procedural formalities and provision of
sufficient amount by the concerned agencies and reducing transaction costs to
develop market for microfinance in the province.

NGOS active in the microfinance business in the NWFP include: Sarhad Rural
Support Program (credit line of Rs. 10 million), SANGI, Swabi Women Welfare
Society, Khwendo Kor and NRSP.

A re-focusing on micro finance in the banking sector through training,, flexibility and
building of trust and through special outreach programs is urgently required.

Demand Side Issues

A number of conclusions, suggestions and recommendations emerged from the Focus
group discussions in each of the six districts. In general, the participants believed that
access to financial services has improved over time but there are several regulations,
65
procedures and policies that negatively affect the access and effectiveness of financial
services.

66

References

SBP, Annual Report of the Central Board of Directors, FY2004.
SBP, Pakistan: Financial Sector Assessment 2003
SBP (2003). Banking Statistics of Pakistan.
World Bank, Brazil: Access To Financial Services, Report No. 27773-BR, February 19,
2004
Government of Pakistan (2003). Annual Report 2002-2003 Pakistan Post: Committed to
Change
Government of Pakistan. Household Integrated Economic Survey (2001-02). Federal
Bureau of Statistics, Islamabad.


67
Annexures
ANNEXURE A
Record of Meetings

February 9, 2005
Stephen F. Rasmussen, World Bank, I slamabad
IDS participants: MKN, AS, AW, HN

Demand is not a constraint for microfinance.
A study on informal microfinance was conducted by Adnan Qader of Staff
College, Lahore (+ Faisal Bari of Mahbub ul Haq Center)
Pakistan Microfinance Network (PMN) did performance indicators report on
microfinance (April/May 2003).
NGOs in NWFP: SRSP, Sangi (Abbotabad), NRSP, Lachi Poverty Reduction
Program (Kohat), Khando Khor (funded by PPAF), Swabi (funded by PPAF)
Projects: Malakand and Barani II.
Khushhali Bank is not a member of PMT. Micro-leasing not included in the
last report. Now a member.
BoK handles microfinance. (A Philipino is developing microfinance program
for BoK.)
Also, First Microfinance Bank and Khushhali Bank.
Leasing in Peshawar: Orix and Network Leasing
Under the Microfinance Ordinance 2001, microfinance is defined as credit up
to Rs. 100,000.
Need data on leasing by size; outreach; client characteristics; Supply
limitations and constraints and a discussion on policy issues.
Look at PPAF studies. Gallup has done a study for PPAF. Ahmad Jamal
Chief Operating Officer at PPAF supervised the study on the Impact of
microfinance.
Microfinance by commercial banks (e.g., loans to NGOs)

February 23, 2005
Etrat H. Rizvi, Commissioner, SECP, I slamabad
IDS participants: SJM, AW, HN

Classification should be functional rather than control based: he suggested 7
category functional classification CBs, DFIs, NBFCs, Modarbas, Insurance,
Microfinance, and NGOs
All CBs (42-46) DFIs (14) are regulated by the SBP. All NBFCs are regulated
by the SECP. These include: leasing and housing
NBFCs include Finance companies, investment finance, venture capital,
Mutual funds, investment advisory companies, discount houses and Housing
Finance.
68
SECP is regulating NBFCs since November 2000. Previously the SBP
regulated them. No one is regulating NGOs
Of the 14 investment houses , only six are active. Two such banks in NWFP
(Prudential Investment Bank and Islamic Investment Bank) have some
negative aspects. They are taking deposits but cannot pay off. (Amounts in
deposits: Prudential 1.3-1.4 billion rupees and Islamic 145-150 million
rupees).
After mergers and closures, the number of leasing companies has come down
from 34 to 26. Of these, 7-8 are operating in NWFP.
There are three venture capital companies - none in NWFP.
There are 30 mutual funds companies; none in NWFP. They use other
financial institutions in NWFP (like Jehangir Siddiqui)
There are four Housing finance companies (one in public sector and three in
private). All private sector companies are dormant.
Only the public sector company operates in NWFP. Two of the dormant
companies are trying to become active.
There are two discount houses; none in NWFP.
Of 42 modarbas, only 18-20 are active. There are 6-7 working in the NWFP.
A study on performance of modarbas was initiated at the SECP under Mr
Etrat Rizvi some two weeks ago.
There are 41-42 general insurance and 5 life insurance companies. The
number in NWFP is 25-30.
There are 4 microfinance banks, namely, Rozgar Bank, Network Finance
Bank, First Microfinance Bank and Khushhali Bank.
There are some 11-12 thousand NGOs (who are not regulated by any
authority). Some are doing excellent work but the bulk are not..
In 1995 or 1996 a study on microfinance was funded by the Swiss
Development Corporation (SDC). It contains profiles of microfinance
providers. The Leasing Association of Pakistan is still working with SDC.
Write to the Governor SBP or Mr. Taufeeq (Deputy Governor) for data.
Annual report of the SBP should have most of the information. Most of the
regional data would also be available with the SBP.
The NBFCs deal with 4-6 percent of the total financing see table supplied by
Mr Etrat Rizvi.
The Commissioner for NBFCs in the SECP is Mr. Salman Ali Shah.
Two reports on leasing and insurance companies were provided. A report on
modarbas is being launched.

Maj Gen (R) Agha Masood Hassan, Director General, PMG, I slamabad
Mr. Zia-ur Rehman
IDS participants: SKQ, AW, HN

There are 13,000 post offices (POs). Of these, 9.500 are in villages. The POs
are currently underutilized. These can work as agents for other financial
institutions. Currently, the PMG has arrangements with the DHL for parcel
69
delivery and Western Union for money transfers. Negotiating with the
Khushhali Bank to act as an intermediary for microfinance.
The latest yearbook would be available in a day or two. Shared last year's
yearbook.
The POs have 87 billion rupees in its saving accounts.
The service provided by the POs include: saving accounts, money transfers,
couriers, pension payments, and remittances.
All requested data would be provided.


Sarshar Ahmed Twaha, Acting Director General, CDNS, I slamabad
Mahmood-ul-Haq, I n charge Statistics, CDNS

Attock is counted in NWFP.
The two regional directorates are in Peshawar and Abbotabad.
There are 3,300 employees.
Issues:
All actions require clearances which affect client service. A move is on to
make CDNS an autonomous body.
Currently all operations are handled manually. Automation is now being
initiated.
ADB funding is available to handle the above.
Most of requested data is available at their website: www.savings.gov.pk.
Will fill data instrument (as revised by IDS) and send it back.


February 24, 2005
I srar Ahmed, Executive Vice President and Area Chief North, Askari Commercial
Bank, Ltd., I slamabad
I rfan Malik
IDS participants: MKN, AW

Their Northern Zone covers Rawalpindi/Islamabad, AJK, NWFP and Jehlum.
Regional data is available but may not fulfill our classification requirements,
like gender and details on deposit mix.
Some data may not be shared but they will try their best to give as much as is
possible.
The data available in the zonal office will be provided in a day or two, some
NWFP specific information will be obtained from the NWFP branches and
then provided to us.
Details of borrowers of amounts equal to or more than Rs. 500,000 are
reported to the SBP, who check for any default and advise back.
A firm in the name of Datacheck (based in Karachi) provides services to all
financial institutions on defaults on the consumer finance side.
Research department of the SBP should be able to provide data on all banks.
70
All data to the SBP is passed on through the headquarter office of each bank.

Feb. 28, 2005:
SMEDA, Regional Office at Peshawar,
Met with : J aved Khattak Manager ( has moved from the Khyber Bank)and Kamran
Masood Niazi, Asst. Manager (Marketing).

In the NWFP SMEDA has 3 reginal Business centres at: 1) Abbotabad (2)
Mingora and (3) D.I.Khan. In addition there is an Investment and Trade
Advisory Centre at Peshawar.
SMEDA performs following functions: Facilitation, Consultation, Advisory,
Capacity building, Marketing, Legal help (concerning small business, taxation
etc) , Technology (transfer, up gradation) and feasibility studies.
In the Peshawar region 50 % of the demand for microfinance activities is for
finance, 27 % for market related activities, 10 % related to technology etc.
NGOs funding micro finance activities are confronted with recovery
constraints. Groups funded by the NGOs are not homogeneous entrepreneurs
but are diverse group. Bank of Khyber a pioneer in microfinance in the NWFP
has selected certain area clusters in the urban areas.
Bank of Khyber has 29 branches in the country and 17 are in the NWFP with
21000 clients. BOK has advanced repeat loans to achieve higher recovery
rates in microfinance funding. The basic advance is of Rs.20000, with
increments of Rs. 10000 with a ceiling of Rs. 100,000. BOK recovery rate in
microfinance is reported at 90 %. The BOK has been Number one in micro
finance, Khushhali Bank is number 2 in this context and operates in Peshawar,
Mardan and Kohat districts ( both urban and rural areas). number
In collaboration with universities and training institutions SMEDA has also
established Entrepreneur Development Centers in the NWFP.

Suggestions: An urgent need for training people in SME related and micro
finance activities as the trained professionals in this field are not available.
The Institute of Bankers should include SME related topics and microfinance
in their training programs. The people in the NWFP are reluctant to borrow
from the traditional banks. There is also a need for streamlining procedural
formalities to develop market for microfinance in the province.

SME Bank has only one branch in the NWFP at Peshawar.
NGOS active in the NWFP include: Sarhad Rural Support Program, with a
credit line of Rs. 10 million. Others are Sangi, Swabi Women Welfare Society
and a branch of NRSP at Mardan.

Need for focusing on SME/ micro finance in banking sector sky is the limit to
the market.
Need for special outreach programs, special training flexibility and building of
trust

71

Zari Taraqiati Bank Ltd (ZTBL), Peshawar:
Met with Malik Ahsan, Director Audit NWFP, Hidat-ur-rehman and Saleem

Regional offices of ZTB in the NWFP are at: Peshawar( the largest region in
the province with 36 branches), Abbotabad with 7 branches, DIK, Bannun,
Kohat, Mardan,Timargarh, Mingora and Chitral. Each regional office has 6-7
branches and is headed by a Regional Manager. There is also a Legal cell,
Investigation complaint unit, vigilance unit and a business unit located at the
Peshawar region premises but are under the control of head office at
Islamabad..
The bank officials interviewed claim ZTB/ADB has played a major role in the
agricultural development of the country/ province through financing tractors,
tube well and also production loans. A large proportion of the farmers have
small holdings and collateral poses a problem in farm loans. The low producer
price particularly at harvest time pose recovery problem in loans . Recently
announced policy of withdrawing certain punitive powers of the ZTB staff
considered by the bank officials to adversely affect loans recovery. To avoid
mis utilization of production loans need for consumer finance emphasized.
ZTB production loans carry a mark up of 8-9% per annum. (checked with
other banks which advance working capital to other trade and industry at 4-6
% mark up.
In mobilizing deposits the bank is handicapped for lack of sufficiently large
network of bank branches in the far flung areas. Moreover, the bank a
specialized bank is not geared to mobilization of deposits.

Habib Bank Ltd. Regional Office Peshawar:
Meeting with Mr. Shahab Khattak, Regional Chief who has recently joined the
regional office. He was assisted by Mr. A.G. Arshad.

HBL has 1468 branches in Pakistan including 58 overseas, claimed largest net
work in all 6 continents. In connection with data concerning NWFP other
sources worth trying are: Provincial Chamber of Commerce and industry,
Bureau of Statisitcs.The regional offices of the the HBL donot necessarily
correspond with provincial boundaries. Regional offices include those at
Mardan, Peshawar and D.I. Khan (also covers some areas of the Punjab0
Haripur and Abbotabad of the NWFP are attached to the Islamabad office.
The credit is sanctioned at branch, regional and head office levels. 90 % 0f the
loans are secured by collateral ( land / buildings) and by 100 % if personal
guarantee included . Stocks and tradeed goods are major collateral for traders
loans. Important considerations in deciding loan application are : purpose of
loan; borrowing history; income; collateral and size of the loan in that order.
For normal loans processing time is 1- 7 days. As the people donot maintain
record of their incomes and economy is not widely documented this militates
against access to formal sources of lending as well. Generally the people in
the NWFP are reported to be conservative, credit shy religious and prefer to
72
do business with their own capital. The NWFP has lower cases of loan write
offs and fewer defaults.
Consumer credit for the purchase of household durables (t.v. computer ) to
the extent of 30% of the home take salary. House building finance upto 90 %
of the equity is financed with 10% downpayment. Flexifinancing is only for
the salaried people.
For account opening a copy of the NADRA issued card (receipt in case of
applicants) and a reference from the Account holder is required. Size of the
population is an important consideration in opening new branches.
There are about 200 flourmills in the province with varying capacity. There is
a lot of idle capacity because of shortage of wheat.

March 1, 2005
The Standard Chartered Bank, Peshawar
Met with Syed Salman Arif (Manager), has moved from the Citibank. The Standards
and Chartered Bank is the successor to the Grind lays and A.NZ. Grind lays banks

Only one branch in the NWFP, but expansion is on the cards
The bank is not giving loans for car; house building in the NWFP yet although
such loans being advanced at other places. Their only loaning is against
deposit i.e. over drafting. No collection of utility bills and no discounting of
bills either.

Union Bank,, Peshawar
Met with Mr. Naeem Khan Area and branch manager at Peshawar.

The Union Bank has four branches at Mardan. Mingora, Peshawar and
Hayatabad. No branch of the bank in the southern par of the province. Its head
office is at Karachi , headed by Mr. Shaukat Tareen.
Centralization of the banking operations are on the rise and will increase the
time in processing papers like LOC. Centralization is also accompanied by
specialization. Need for area specific policy parameters. Targets fixation by
the head office without involving the local office.
Consumer credit is available in the NWFP. Sanctioning of house building
loans may take 4-5 weeks in the Union Bank.
There is a Service Quality Dept in the bank headquarters which keeps track of
the trends in the banking sector.
The Marketing Dept conducts customer surveys after two years by
interviewing 10% of the randomly selected clients.
The Union Bank has no micro finance activities.
It has recently started farm loans through Kissan card scheme in the Multan
zone.
Among the recently started new private banks the UNION BANK may be #1
or 2. ( Union , Alfalah, Prime, Bank Al Habib, Metropolitan, NIB, KASB,
PICIC, Faisal).
73
Lack of documentation and non-maintenance of proper records in the NWFP
are constraints in access to credit.
Transit trade is hurting industrialization in the NWFP

March 2, 2005
The First Women Bank, Peshawar:
Meeting With Ms.. Attiya , the regional head. She joined UBL in 1975 from where she
has moveed to the First Women bank and established the banking operations in the
NWFP at peshawar.

Total bank branches are 38 with about 300 employees in the country. All bank
staff comprises of women except the security guards.
The bank has 4 branches in the NWFP (44 employees), 2 at Peshawar, 1 at
Abbotabad, and 1 at Mardan.
By December 2004 the bank deposits in the NWFP were 443.32 million, 13-
14 % of the overall in the country. The bank has a uniform lending policy.
IT facilities in the bank are somewhat lacking. Automation of banking
operations though good for improving efficiency but has also created
problems due to lack of adequate training, power failures and lack of back up
facilities.
Banking operations are quite centralized which is also on the rise due to the
technological advancement but still no substitute for the expertise and
knowledge of local culture, traditions and values as well as local social and
legal conditions in deciding loans and related aspects. Thus need for a
judicious balance between centralization and delegation of authority in
loaning operations.
Hundi system is still widely relied upon in transfer of money and affecting
banking activities in the formal sector. Hundi is told to be quick, flexible and
cost effective transferring money within 24 hours are so while the banks for
the same operation may take 4-5 days. She narrated a story of remitting
money to her niece studying in the UK.
The bank is providing useful service as well (loans, other banking services to
women) as employment to educated women but is constrained in expanding
its operations for want of trained manpower. After marriage the girls are
especially handicapped as the bank operations located in major cities if
husbands unable to accompany for employment and other reasons. Mobility
also a problem

State Life I nsurance Company (SLI C), Peshawar
Met with Adnan Malik, Dy. Manager Services

SLIC is the largest Insurance Company in Pakistan, head offoice at Karachi,
annual premium Rs. 2500 million. Insurance operations are concentrated in
the urban areas. Other major insurance companies include; Eastern Federal
Union, New Jubilee Insurance and America Life Insurance Company.
74
SLIC in the NWFP is also trying to target rural area along with the urban
through its policy of lower premium in comparison to its competitors who are
confined to urban areas and charge higher premium. Askari, Aadamjee and
EFU insurance companies are also vying for insurance business in the NWFP.
There is general lack of awareness about insurance and appreciation of its role
in risk mitigation in the NWFP, a conservative society with strong religious
bent and tradition. Regional considerations also influence business expansion.
The northern region of SLIC comprises of Peshawar, Swat, and Abbotabad
zones. In 2003 Peshawar zone had a premium of Rs. 750,000.
The insurance business in SLIC is conducted through: Sales Representative,
Sales Officer, Sales Manager ( these are commission based jobs; the first
regular employment in SLIC is of Area Manager.

Need for investing insurance funds in sharia compliant business options and
learning from Malaysian experience of Islamic Insurance.

Sarhad Rural Support Program (Srsp):
Met with Mr Wasiq Ali Khan , Head micro credit, and Mr. Sarmad Khan, Manager,
Planning Monitoring and Evaluation

Started under Companies Ordinance in 1989/1990 as private ltd co as a non
profit organization. Established under Govt Initiative originally as a
Coroporation under article 41, following AKRSP model It has a Board of
directors , chair is Mrs. Munawar Humayun Khan Donor funding from DFID,
ADB, IFAD, UNICEF,CIDA, GOVT. , GERMANY.
Follows a holistic program major theme of the SRSP is social mobilization.
The program areas are: education, health, infrastructure, microfinance, water
and sanitation. SRSP present in 11 districts primarily in the north districts of
the province and has organized 6500 social organizations covering all tehsils
in these 11 dists:In the 12th dist. DIR only programs in the education and
poverty reduction areas.
Although it has not covered the southern dist of the province yet but extends
technical assistance all over the province. Microfinance activities are
confined to 9 districts: Peshawar, Noshera, Mansehra, Batagram, Haripur,
Abbotabad, Kohat, Hungu, and Chitral
Direct lending through community groups comprising 20-25 members for
livestock related activities
(ceiling Rs.30,000), crop production ( ceiling Rs. 5000) and micro enterprises
(Rs. 15000). Emergency loans upto Rs. 10,000/ to protect against the sale of
assets.
Business loans for income generating activities a loan of Rs. 10,000 is given
and goes upto Rs. 20,000 in 2nd year.
The SRSP has advanced loans of Rs. 250 million since 1991, of this 30
million are outstanding. Non performing loans have been 10% so far.
Repayment capacity is often overlooked and not properly assessed and blind
75
trust placed in community groups recommendation.. Average period in
asssessment and loan approval is 15 days.
Two of the districts have regional program managers.In each program dist
there is one Dist Credit Officer and two credit (1 male + 1 female) officers.
The community organization forwards the loan application of members and
provides guarantees. Social collateral / peer pressure remains the main
instrument. Borrower has to provide two personal guarantees from the
community group. The community account with a bank in the name of
community group is a requirement for the registration of the group with
SRSP.
Enterprise Development Section identifies viable projects and 7 days training
in enterprise development is imparted.
SRSP unlike the NRSP and PRSP does not have any endowment fund.
Support is also coming from PPAF.
Microfinance of barani area project (Kohat, Hungu, Karak) funded by IFAD is
held up. Malakand Rural Development project in Dir, Swat and Bannun dists
is assisted by ADB.
There is a need for establishing a Risk Mitigating Fund.
Recovery has improved from 86 to 92 %, for female loans recovery is 94%.
Of all the loans 70 % have been to the male. In the revised program 70 %
loans are planned for female and 30% for male.
NRSP is active in microfinance activities in Mardan and Malakand districts in
the NWFP, and SUNGI in Abbotabad and Haripur districts. There is another
NGO, Khawendokarr active in Dir, Peshawar and Karak dists. The mark up
charged by the NRSP on microfinance is 18 %. There is a flat processing fee
of Rs. 900 per loan. No interest is charged on emergency loans. On business
loans flat rate of 1 % per month on total amount is charged as interest.
Future Prospects: Limited scope due to inadequate infrastructure. Transaction
cost is also higher. Expenditure estimated at Rs. 2 million /annum.

United Bank Ltd, Peshawar
Met Fahim A. Siddiqui, Regional Chief at Peshawar. Region (includes Chitral)
corresponds with provincial boundary in this case.

Undocumented economy in the NWFP is a major constraint in institutional
funding. Concern over money laundering activities. No big industry in the
NWFP. Major activity relates to trading, but no documents relating to
incomes, balance sheet and cash flows. In Chowk Yadgar area of 100 meters
there are12 banks.
15 days for normal loan processing.
There is a central branch in every district. There are 87 central offices in the
country and are on line. Area branch has 78 bank branches under it. UBL,
before privatization was incurring loss, has now turned into a profitable
venture. UBL made a profit of Rs.5 billion before tax in2003 and Rs. 3.8
million after tax.
The Govt. share in the Bank is 49 %, management is in private sector.
76
UBL loaning for agriculture in the NWFP is Rs. 250-300 million.
Hundi still a common mean of remitting money in the province.
The bank has 1000 branches in all.

March 3, 2005
Bank Alfalah, Peshawar :
Met with Muzammal Z Malik- Branch Manager, Mr. Noman Credit Officer.

The bank housed in a 100 year or so old building of Hayat Furnishers, 10,000
clients in peshawar branch of Alfalah bank, 7 year old in operations ; owned
by Al Nayahan Group. Bank has 95 branches in Pakistan and planning 55
more in 2005.
The Bank is new to this region but market response has been very good.
The Bank has 13 regions in all . The NWFP regional head office is at
Peshawar.
Hazara region of the NWFP is attached to Islamabad region but rest of the
NWFP is with Peshawar region., having 7 branches at: Abbotabad, Mingora,
Mardan, Two in Peshawar, Kohat, and DI Khan.
Three more branches are planned 2 in Peshawar ( G.T. Road and at
Hayatabad) and one in HUNGU. The bank branches are opened in
consultation with regional staff who conduct some studies about financial
viability.
Bank Alfalah requires a minimum deposit of Rs. 5000 in current account and
Rs. 10,000 in saving account.
The bank provides following services: on line banking, car finance and
travellers cheques.
The bank also promotes employment of local people through its recruitment.
Provides loans for farming and working capital.
Agricultural loans started about 2 years back and include credit for livestock,
fishing, breeding and farm machinery. Agri. Credit officers, graduates in
agriculture, recruited for farm loans. Agri. Credit portfolio in Pakistan is Rs. 2
billion.
Bank Alfalah, a promising bank with Rs. 130 billion deposit in 2004billion,
will become 5th largest bank in the country. The Peshawar branch of the bank
claimed to be the largest of all bank branches in the NWFP. The banking
operations in 30 cities in the country.
Delinquency rate is zero.
Has a consrvative potfolio. Lending for SME, trade and industry, agriculture
and consumer credit. Bank in its activities gives importance to Human
resource development, Training academies at Karachi and Lahore . Banking a
game of spreads and competitiveness.
Alfalah aims at courteous and client oriented service. Opening new accounts
require interview and new I.D card.
77
Consumer finance: 40% of new cars in December 2004 financed through
Alfalah at # 1, and UBL at # 2. The banking hours 9-5, and bank is
coservatively aggressive in its approach.


SME Bank, Peshawar
Met with Mr. Fareedun, I ncharge at Peshawar

SME head office at Islamabad. SME is successor to RDFC and SBFC. 65
branches in Pakistan. 5 branches in the NWFP but only one is functioning in
commercial banking as 4 old branches engaged in recovery of old loans.
Maximum loan limit is Rs. 30 million, lowest Rs. 15000.
Activities included import substitution, manufacturing, value addition and
generation of employment.
SME will be privatized in2006 and have 26 branches in the country.

Department of Finance, GoNWFP, Peshawar:
Met with Secretary Finance, Mr. Zia-Ur-Rahamn, Secretary Finance.

HE suggested meetings for the team with the following : Secretary
Agriculture NWFP, Registrar CO-Operatives NWFP and Senior Member
Board of Revenue NWFP.
In the districts being visited by the Survey team for Focus Group Discussion
meetings with the District Revenue officer and Dist Agri. Officers.
Luncheon meeting at Pearl Continental, Peshawar:

Present in the meeting were representatives from the: NBP,
UBL,MCB,,ZTBL, Sarhad Rural Support Programme, World Bank (Drs.
Magdi, Paul Wade, Khalid Ikram, Ms. Malik Construction -consultant, Mr
Qureshi - consultant on Hydroelectricity), IDS team (M/S Wasay, Niazi,
Salam)

Need for a conducive economic environment to promote investment activities
recognized a key variable.
The constraints identified included inadequacy of legal system in
enforcement of contracts, lengthy and drawn out procedures. The experience
of the cancellation of the contract of motor way contractors was pointed out
also in this context.
In the meeting it was pointed out that construction industry was lobbying for a
specialized bank to finance the credit needs of this industry. The government
policy regarding this industry was not clear. The issues relating to
performance guarantees, call deposit and other guarantees also figured and
cash flow for various activities in the discussion. However, the meeting
recognized the need for specialized and sector specific products to cater for
the needs of various sectors in the general banks.
78
The need for a continuity in the govt policy was emphasized as the previous
experience in this context was not very encouraging. The participants in
general expressed many apprehensions about the lengthy govt procedures in
contracting, payments and related risks.
While discussing the issues relating to the investments in hydroelectricity
sector, its capital intensive nature was recognized.
WAPDA was the only buyer of the power being generated and had high
transmission losses. Selling power to WAPDA was problematic for the
private sector.
State of the infrastructure in the sector was also quite poor.
The experience of Chitral power project by a private company. attracted the
interest of the Participants.
The cash flow for the project may be a better basis for providing credit and
higher recovery rate rather than the security based lending.
Need for supervised credit in farm and SME loans and in microfinance.
Mark up on industrial loans reported at 6-7 % in comparison to 9 % in
agriculture.
46 % population in the NWFP below poverty and 70 % of that is in rural
areas.
SME small loans upto RS. 10000 and SME unable to meet all the demand
and hardly meeting 20%.
Credit risk bearing capacity of SRSP is low and the NWFP govt. not bacing
its microfinance program.
ADB credit lines for the Barani Development Project and Mansehra Rural
Development project

March 10 2005
Further Meetings At Peshawar :
As a follow up to meeting with Secretary Finance and on his advice meetings were held
with : Additional Secretary Agriculture Mr. Abdul Ahad Qureshi ( Secretary was not
available). Mr. Qureshi is a crop scientist and employee of PARC, and
Dy. Registrar ( Mr. Aminullah) and Registrar ( Syed Amir Uddin Shah) Co- Operatives
Dept. Senior member Board of Revenue asked to come some other day.

Gist of the points of discussion with Mr. Qureshi:
Package of agriculture Credit by the Bank of Khyber is yet to be decided by
the Senior Minister. Agriculture has not received much attention.
Small and marginal farmers not the main beneficiaries of ZTB loans, which
are also misutilized.
Awareness about various loans is also a problem
Timely availability of credit and inputs are major problems in the NWFP.
Absentee landlords do not provide inputs on time to the tenant.
Orchards primarily owned by he landlord/ Khan. Tenant works in the orchard
as a worker with no share in the income from the orchard.
79
Poor infrastructure increases the transaction costs of inputs and outputs and
also impacts on the quality of the produce.
No seed industry in the province.
Low capacity of the farmers to purchase costly inputs.
Population conservative in their outlook and with a religious background
unwilling to accept interest related loans. Replace interest with service
charges.
Passbook remains a problem for the farmer. Lengthy and complicated
procedure discourages the farmers. Farmers with passbook also reported to be
having higher defaulter rates.
One window operation of ZTB not effective in the NWFP as officials of the
Revenue Dept do not co-operate. Malpractices of ZTB officials also alleged.
Allocation of loans in the NWFP is higher but disbursement much less

Co Operative Department

Total number of Co op Societies in the NWFP 8434, and Agri. Coop societies
are 8127. The provincial Co Op bank in the process of liquidation since 2001.
Outstanding Cop loans; principal Rs. 201,168,327, mark up RS. 102,038,996 ;
totalling at 303270323.
The Standing Committee of the NWFP Assembly has recommended for the
revival of provincial Co-operative Bank.
The cooperative bank loans were much cheaper, with 3-4 % points less mark
up than that of ZTB. Last loaning by the Provincial CO_OP Bank was in
1995. Currently main emphasis is on recovery of loans. Some of the loans
outstanding since 1977.But procedural problems involved and discontinuation
of loans has also added to the problem. The withdrawl of certain powers as
announced in the Kissan Package is also hindering loans recovery. The local
traditions and culture also hinders the sale of mortgage d property and
recovery of loans. Writ of the government has also weakened overtime and
added to the problem. Politically motivated government policy of
pronouncement has also not helped in this context.
Secretary of the Co-op Society is the main actor in the societys transactions.
Personal guarantees for RS. 50,000 loans. Members borrowing put up their
land as security / collateral to society which pledges it to the CO-Operative
bank.

March 16. 2005
Group Focus Discussion at Swabi:
Conducted by Abdul Wassay, Abdul Salam and Inyatullah

Meeting held at the Office of Dist. Nazim Assembly Hall. Representative of
ZTB, HBL, NBL, Social welfare organizations, Nazmins of different Union
Council Including one lady Councilor (Ms Shafqat Rani) were present. Some
of the participants were also engaged in farming and trade activities.
80
Farmers attending the meeting complained about the lack of: finance, high
output prices, low producer prices and marketing practices of tobacco
companies as they try to exploit the farmers inability to hold the produce in
the hope of better prices. It was reported that farmers having agreement with
the tobacco companies for supply of tobacco are preferred clients for loans by
the banks. However these companies if supplying inputs/ credits for the inputs
use refer them to specific suppliers but they charge higher( Rs. 100-150 more
per bag of potash /DAP) price than the market rates.
Major tobacco companies operating in the dist. Include Pakistan Tobacco
Company and Lackson . The latter also has a processing unit in the dist..
The crops grown in the dist are: wheat, tobacco, potato, sugarcane, maize,
mattar, ground nut. There are orchards of citrus and deciduous fruits also.
Swabi famous for maize and tobacco cultivation and number one dist for
tobacco. Tobacco varieties cultivated are virginia and white patta
There is a tobacco cess @ Rs 2/kg which is deducted at the source i.e. by the
companies from the proceeds of the produce. The prices of tobacco as
announced by the Tobacco Board/ Govt are not strictly enforced and farmers
suffer in the process. Tobacco prices have recently ranged from Rs.12-28 per
kg.
Farmers complained about low producer in general and tobacco in particular
which have not kept pace with the rising input prices. This adversely impacts
their ability to service their loans. Land rents reported in the dist about Rs.
4500 per jareeb (Rs. 9000 / acre).
No offices of Insurance, lease companies, HBFC, Khushali Bank of Khyber in
Swabi Dist.
Bank loans for various commercial activites are few and far between and
require lengthy procedures and formalities. Documentation is also a problem.

ZTBL ( 2 branches in Swabi),.

Mark up on agri. Loans is 9 % per year which is higher than that of industrial/
commercial loans. Passbook for agri. loans needed but involves lot of effort
and hassle.
Since January 1, 2005 ZTB has advanced RS.11,690,000/ to 136 farmers.
Production loans constituted 85 % and development loans15 %. Recover rate
by December 31, 2004 in Swabi was 78%.
The Bank officials consider recently announced withdrawal of Bank powers
regarding arresting of defaulters will adversely affect loan recoveries. Bank
officials held responsible for pending loans but govt keeps on announcing
relief packages, which discourages loan recoveries. The present recovery rate
is 5% points less than the corresponding rate of last year. Court procedures
for loan recoveries lengthy and favour defaulters at the expense of bank. It
was also alleged that farmers borrow from tha banks in the hope that these
will be written off.
Habib Bank with 19 branches has deposits of Rs. 80 crore in the dist and 75 %
of these is in savings accounts. Has started agri.loans in recent years.
81
HBL loans in Swabi total Rs. 30 crore, 60 % for agriculture, 25 % for flexi
loans , trade about 15 %.
Mark up on farm loans 9%, industrial loans 10-12 %, Flexi loans 11 % on
reducing balance. The loan ceiling for various crops is fixed by the SBP and
for tobacco it is Rs.23000/acre and 80 % of the limit is usually is given by the
banks.
Farm loans provided against pass book, flexi loans qgainst employers
certificate. Recovery rate reported at 90 %.
NBP has 17 branches in Swabi dist, deposits of Rs. 70 crore and lending
around Rs. 70-80 lac in one branch.
Main Problems /Suggestions:
Documentation is the major problem in obtaining loans. Small and marginal
farmers unable to avail farm loans. Similarly poor are handicapped in their
access to loans. People also blamed lengthy procedures and pleaded for
simplifying the formalities and processes. Also suggested for uniform mark up
in various sectors.
No micro credit facilities in Swabi dist., No cold storage in the district, no
markets for the farm produce which has to be taken to Rawalpindi, Peshawar.
Need for providing / improving market intelligence price information to
improve farm incomes.
82

ANNEXURE B
Persons Visited


Government NWFP
Department of Agriculture, Additional Secretary Mr. Abdul Ahad Qureshi
Department of Cooperatives, Deputy Registrar Mr. Aminullah
Department of Finance, Secretary

83
ANNEXURE C
A Note on the Financial Sector Reforms in Pakistan

The broad thrust of reforms has been to promote a market based privately owned
financial sector under a sound regulatory environment. The reform strategy was based on
five pillars of restructuring and phasing out weak DFIs, developing a corporate bond
market, setting up CIRC to deal with NPLs, promoting a network of MF, and making
SBP autonomous and capable of regulating banks. The main objectives were to privatize
NCBs so that 80% of banking assets are in private hands, consolidate the banking sector
through liquidations, acquisitions and mergers, so that a few strong banks would provide
a full range of services, restructure and strengthen NBFIs to make them an integral part of
the financial sector, and build of institutional capacity of SBP and SECP to make them
effective regulators. SECP has been strengthened for effective regulation of all NBFIs
and insurance companies through organizational restructuring, strengthening of
regulations and better staffing. SECP functions under the direction of a strong,
independent policy board.

These reforms have brought in the following improvement in the financial sector.
The government has reduced profit rates on NSSs to remove distortions and make them
affordable to the government.

Nationalized banks have been privatized except NBP. The rapid transformation of a
predominantly nationalized banking system into a private sector owned and managed
system has brought about fundamental changes in the ground rules governing the
allocation of credit. The approval and disbursement of loan based purely on political
considerations has given way to rigorous credit and risk appraisal and improved the
quality of new loans.

Liberalization of interest rates, both lending and deposit rates, elimination of credit
controls, and lower cash reserve ratios have led to prudent risk management by banks.
More developed money market and capital markets are better able to intermediate
between savers and investors.

New set of prudential regulations has provided a better framework for management,
banking practices and bank supervision based on international best practice. High
minimum capital requirements have helped in weeding out weak institutions leading to
mergers, acquisitions and consolidation. Stringent enforcement of good governance has
put in place better ownership and managements in control of banks. Banks have adopted
better technologies and HR practices to improve their services and save on costs. With
Financial Recoveries Ordinance in place, default cases are being handled in a more
orderly manner. SBP has launched PIBs extending upto 20 years to develop benchmark
yield curves for long term investors, particularly insurance companies and other
institutional investors.

Reportedly, these changes have resulted in fierce but healthy competition in the financial
sector and interest rates have fallen and service quality has improved. Improved
84
efficiency in banks has led to a sharp reduction bank spreads. Several other post 9/11
period developments also helped in reducing bank lending rates, i.e. a sharp fall in public
sector demand for bank credit, increase in remittances and foreign aid, reduction in
corporate taxes, and lower NPLs.

Reforms in capital markets consisted of development of electronic trading and settlement
system, development of a debt market along with equity market, broadening of investors
base by privatizations through stock markets, encouraging mutual and pension funds and
brokers to expand their outreach, phasing out malpractices and bringing in better
regulatory environment.

Insurance sector has been opened to competition, both domestic and foreign. The
Insurance Act 1938 has been replaced by Insurance Ordinance 2000 that allows easier
acces to markets, requires a level-playing field between private and public sector
companies, affords a greater flexibility for portfolio management, and encourages active
and involved regulatory oversight.

Policy Issues and Concerns

Improving Access for Priority Sectors and Middle and Lower Income Groups

Financing of agriculture and SMEs has increased but still remains far below the desired
level. Agriculture lending had remained limited until recent past, by ADBP and
provincial cooperative banks only. The scheme of agricultural credit was revamped and
opened to commercial banks in 2000. In 2004, the agri-loans by commercial banks
exceeded the ADBP and cooperative banks. However, the overall credit to agriculture
sector remains much below the required level. Similarly commercial banks have started
lending to SMEs because the competition has squeezed their margins on lending to the
corporate sector, although only SME Bank has been assigned the responsibility for credit
to SMEs. The new Prudential Regulations will also help in expansion of credit to this
sector.

Agriculture and SMEs account for 85-90 percent of employment in this country.
Improving access to finance by these two sectors by commercial banks will naturally
generate economic activity and employment for lower and middle income class. More
recently, the housing sector has been identified for priority on the same grounds.

Banks and FIs have moved into mortgage and consumer finance. Banks are broadening
their client base, adding new products to their portfolio and offering new types of
services. This would not only diversify their risks but also earn higher returns. However
the coverage is small and the new set of PRs for consumer finance would further enable
FIs in this business.

MF has been expanding but only gradually. Three chartered MF banks are expanding
their outreach by opening branches, by partnering with other stakeholders. Licensing and
prudential norms for micro finance institutions have been designed with particular
85
emphasis on facilitating growth of these institutions and expanding their outreach to the
poor and vulnerable segments of the population. The move however is in incipient stage,
and with more than one third population in poverty, a much larger efforts are called for.

Promotion of Islamic Banking:

Islamic banking is an attempt to bring into the fold of formal financial sector those who
have remained outside because of their faith and beliefs. So far, an Islamic bank has been
chartered, while many banks have responded by opening special branches and counters
for Islamic banking. This is an extremely positive development as it brings into the fold
of formal financial sector millions of people who have otherwise excluded. Although the
response is enthusiastic, the coverage is small and challenge remains to carefully put
together all the ingredients of the act, Shariah advisors and auditors, credit appraisers and
marketing specialists, product development capacity, systems and technology. While a
careful blend of all these ingredients can turn this move into a success, careless actions
put the future of Islamic banking in Pakistan at risk.

Need for New Saving Instruments

FIs have developed a variety of new products on the asset side but neglected the savers
and depositors. This one sided approach is not sustainable because the savers provide the
wherewithal for banks to perform intermediation. Thus the fiancail saving rate remains
abysmal. The banks and NBFIs have to design innovative solutions for the needs of
savers/depositors.

NBFIs/Insurance Sectors Needs Expansion

NBFI sector is quite small. There is a large mismatch between the institutional and
contractual saving institutions offering long term investment vehicles and the demand for
long gestation mortgage, infrastructure, real estate and project financing. DFIs,
investment banks, venture capital funds, private pension and provident funds and
insurance companies can play an important role in filling in this market segment.

The role of investment banking in Pakistan has remained overcast by the spread of
universal banking. However the market of investment banks remains underserved.
Commercial banks, despite their claims, cannot render services of investment advisory,
corporate restructuring, asset acquisition and disposal, mergers and acquisitions, equity
and debt financing, etc. to the corporate sector. The investment banks can build their
capabilities in the areas to meet this unserved demand. Several investment banks have
merged into commercial banks, but serious players with strategic direction and
appropriate human resources are needed in the investment banking.

Better Skills and HRD is Needed

Banks have put in place transparent and merit based system of recruitment. The next step
in this value chain of human resource development is the continuing education, training,
86
testing and progression of in-service employees and identification of future managers of
the financial industry. In this context some training facilities have been set up in IBP,
NBAF and individual banks for training staff of banks, leasing companies, etc. However
more consultations are needed for design of courses and other responses to the emerging
skill demands which can give a fillip to the FIs services standards.

Better Harnessing of Technology and E-Banking:

Transanction costs of FIs remain very high particularly in the private banks. It is
gratifying that a lot of progress has been made by establishing platforms for electronic
banking, and with deregulation of telecom, opportunities for further value added services
would multiply. New technologies can reduce transaction costs and improve customer
services. A variety of new services can then be offered. ATM penetration is very low and
there is a lot of scope to expand ATMs. Some financial services can be rendered through
phone but the trust needs to be built.
87
ANNEXURE D

Chart 1.1: Share of the Financial sector in GDP and in the Services sector
3.8
3.1
3.6
3.3
3.0
7.3
6.0
6.7
6.2
5.7
0
1
2
3
4
5
6
7
8
2000 2001 2002 2003 2004
Years
P
e
r
c
e
n
t

s
h
a
r
e
Share in GDP Share in services sector

Source: Pakistan Economic Survey 2003-04

88
Chart 1.2: Share of total deposits in Banks and NBFIs
96
92 92
91
92 93 94
97 98 98
4
8 8
9
8 7 6
3 2 2
0
20
40
60
80
100
120
CY90 CY95 CY96 CY97 CY98 CY99 CY00 CY01 CY02 CY03
Year
P
e
r
c
e
n
t

s
h
a
r
e
All banks Total NBFIs

Source: SBP (2003)


Chart 1.3: Share of Bank Deposits by Type of Bank
0
10
20
30
40
50
60
70
80
90
CY90 CY95 CY96 CY97 CY98 CY99 CY00 CY01 CY02 CY03
Year
P
e
r
c
e
n
t

s
h
a
r
e
Public sector commercial banks Domestic private banks
Foreign banks Specialized banks

Source: SBP (2003)

89
Annex table 1: Ranking of NWFP Districts on the Basis of MICS 2001 Data


District Com
bined
rank
Infant
morta
lity
Enrolled in
primary
school
Adult
literacy
5+
Use of safe
water
Adeq
uate
toilet
Average
income
per
capita
Urban
Popul
ation
Haripur 1 1 2 2 14 2 3 12
Abbotabad 2 6 1 1 12 4 4 7
Malakand 3 2 3 7 4 8 8 15
Kohat 4 7 6 3 10 5 1 2
Mansehra 5 5 4 5 17 14 7 19
Peshawar 6 4 13 6 3 3 12 1
Nowshehra 7 8 7 10 7 6 11 3
Mardan 8 12 5 11 6 13 9 5
Karak 9 3 14 4 11 19 15 17
Chitral 10 11 6 8 15 1 18 13
Hangu 11 10 16 14 16 9 5 4
Swabi 12 18 9 13 8 12 10 8
Bunner 13 9 20 22 19 18 2 22
Lower Dir 14 15 10 17 21 22 6 18
Swat 15 21 11 9 9 7 17 11
D I Khan 16 17 17 19 2 10 13 10
Charsadda 17 13 15 16 18 20 14 6
Bannu 18 16 19 12 1 16 20 16
Lakki
Marwat
19 14 21 15 5 15 22 14
Tank 20 20 18 18 13 17 21 9
Batgram 21 23 12 21 20 21 16 21
Upper Dir 22 19 22 23 23 23 19 20
Shangla 23 22 23 20 22 11 24 24
Kohistan 24 24 24 24 24 24 23 23
90
Annex table 2: Participants in the Focus Group Discussions
District Grand
Category Haripur Lower Dir Swabi Peshawar D.I.Khan Lakki Total
Marwat
Banker 2 5 3 2 6 2 18
Borrower Ag 4 5 5 1 3 4 18
Borrower CF 1 1
Borrower Ind 5 1 5
Borrower MF 2 2 4
Borrower RF 3 3 1 6
Elected Rep 1 1 1 2
Govt Official 3 1 6 10
MF provider 4 4 4 12
Unemployed 2 2 1 4
Education 8 5 18
Govt. Official 3 2 3
Postal Service 1 1
Student 1 3 1
Grand Total 15 25 15 13 25 20 113
Borrower Ag Ag Credit beneficiary
Borrower CF Consumer finance beneficiary
Borrower Ind industiral laon beneficiary
Borrower MF Microfinance beneficiary
Borrower RF Running fiannce beneficiary