DEPARTMENT FOR INTERNATIONAL DEVELOPMENT
PAKISTAN: FINANCIAL INCLUSION PROGRAMME
IMPLEMENTING PARTNER: STATE BANK OF PAKISTAN
DFID Pakistan
June 2008
Contents
Page
Contents
2
Abbreviations and acronyms
3
1 Summary
4
2 Project Details (including appraisals)
6
3 Implementation
20
4 Risks
26
5 Conditionality
28
Annexes
1 Architecture of Financial Inclusion Programme
29
2 Letter from Government of Pakistan
31
3 Minute from Prime Minister’s office
32
4 Consultation Record
33
5 Logical framework
37
6 Project Header Sheets
44
7 Environmental Screening Note
56
8 Social Annex
60
9 Risk Annex
67
10 Economic Annex
72
ABBREVIATIONS AND ACRONYMS
A2F
A2FS
ADB
AML
CAP
CEF
CF
CGAP
CLEAR
DFID
FDI
FIP
GOP
ICF
IFI
ISF
KfW
M&E
MDG
MFB
MFI
NGO
NRSP
NWFP
OPM
PCN
PMN
PPAF
PRSP
PSIA
Rps
RSP
SBP
SBP-BSC
SDC
SE
SPV
TA
UNDP
WB
Access to Finance
Access to Finance Study
Asia Development Bank
Anti-Money Laundering
Country Assistance Plan
Credit Enhancement Facility
Challenge Fund
Consultative Group to Assist the Poor
Country Level Effectiveness and Accountability Review
Department for International Development
Foreign Direct Investment
Financial Inclusion Programme
Government of Pakistan
Innovation Challenge Fund
International Financial Institution
Institutional Strengthening Fund
Kreditanstalt für Wiederaufbau, Germany
Monitoring and Evaluation
Millennium Development Goal
Microfinance Bank
Microfinance Institution
Non-Governmental Organisation
National Rural Support Programme
North-West Frontier Province
Oxford Policy Management
Programme Concept Note
Pakistan Microfinance Network
Pakistan Poverty Alleviation Fund
Poverty Reduction Strategy Paper
Poverty and Social Impact Assessment
Pakistan Rupees
Rural Support Programme
State Bank of Pakistan
State Bank of Pakistan Banking Services Corporation
Swiss Agency for Development and Cooperation
Small Enterprises
Special Purpose Vehicle
Technical Assistance
United Nations Development Programme
World Bank
DEPARTMENT FOR INTERNATIONAL DEVELOPMENT
PROGRAMME MEMORANDUM
PAKISTAN: FINANCIAL INCLUSION PROGRAMME
1.
SUMMARY
1.1
More than 17% (27 million) of Pakistan’s population live below $1 a day
and 73% (116 million) live below $2 a day1. The impressive economic growth
record of the past four years and successful financial sector reforms still have
a long way to go before the persisting inequalities among regions, classes
and between genders are reduced. The outreach of microfinance and
other financial services to the poor and marginalised groups in Pakistan
remains very low compared to other Asian countries. According to recent
estimates2, only 2% of the poor in Pakistan have access to microfinance
services against 35% in Bangladesh, 29% in Sri Lanka, 8% in Nepal and 3%
in India.
1.2
Responding to a request from the Government of Pakistan (GoP),
DFID is proposing financial support of up to £50m (Fifty million pounds) to
GoP’s Financial Inclusion Programme (FIP) which will be led by the State
Bank of Pakistan (SBP). The FIP aims to transform the financial market with a
clear objective to provide equitable and efficient market-based financial
services to the otherwise excluded poor and marginalised population including
women and young people. The target population of FIP is very diverse and
includes farm labour, small farmers, small vendors, and cottage industry
workers. Many of the people targeted by FIP are illiterate and live in far flung
areas in Balochistan and NWFP provinces. At present, there are only 1.2m
microfinance borrowers in Pakistan. Under the FIP, GoP has set a target of
reaching out to 3.0m microfinance borrowers by 2010 and 5.0m by 2012.
1.3
GoP issued its Poverty Reduction Strategy Paper (PRSP) titled
“Accelerating Economic Growth and Reducing Poverty” in 2003 which set out
four key objectives - a) accelerating economic growth while maintaining
macroeconomic stability; b) improving governance; c) investing in human
capital; and d) targeting the poor and the vulnerable. Following its key
objective of accelerating economic growth, the PRSP focuses on
development of small and micro enterprises, rural economy and housing for
the low income people. Increased access to finance for these sectors is
articulated among the key priorities of the Government. The Prime Minister of
Pakistan approved a comprehensive Microfinance Strategy Paper developed
by the State Bank of Pakistan in 2007.
1.4
DFID Pakistan’s Country Plan for the period to 2012/13 highlights the
key challenge of promoting sustainable and inclusive growth in Pakistan. The
1
2
World Development Report 2007
from the Consultative Group to Assist the Poor at the World Bank
FIP will improve access to financial services for the poor and thereby increase
incomes through enhancing their access to savings and assets.
1.5
The FIP has been developed in close coordination with key donors and
IFIs. The programme will build on the Asian Development Bank’s (ADB)
“Access to Financial Services (A2F)” budget support programme (US$320m)
which will be completed in 2008 and a comprehensive “Access to Finance
Survey (A2FS)”, jointly funded by the World Bank (WB), DFID, and Swiss
Agency for Development and Cooperation (SDC). KfW participated in the
design phase and are working on a feasibility study to co-finance the Credit
Enhancement Facility (CEF).
1.6
FIP will not only provide better livelihoods opportunities to the poor and
marginalised groups, it will also provide insurance against shocks, improved
skills and higher investments in health and education at the household level.
The FIP outcomes will directly contribute towards Millennium Development
Goal 1 to “reduce income poverty by half by 2015”.
1.7
DFID will provide a grant totaling £50 million over 5 years to the SBP
for FIP. £40 million of the grant will be paid as financial aid. This will cover:
SBP procured technical assistance (£10m); a credit enhancement facility to
attract long term, market based finance for microfinance institutions (£10m); a
guarantee fund for small enterprises and rural populations (£10m) and an
institutional strengthening fund for capacity building of the new microfinance
banks (£10m). The remaining £10 million will be spent on a DFID procured
Financial Innovation Fund for pilots and research on access to finance. In
addition to DFID’s £50 million grant, SBP will contribute at least £1.5m to FIP.
They have already started investments in strengthening their human resource
base, systems, regulations, and developing financial instruments in
consultation with key stakeholders.
1.8
The FIP, led by the State Bank, enjoys complete ownership from top
level economic policy makers and key stakeholders. The State Bank has
demonstrated its commitment and capacity to implement this large initiative.
DFID support for SBP capacity building will further strengthen their
governance and programme management abilities. Keeping in mind the
dynamic nature of financial markets, the programme will be implemented in
two phases. FIP will also have the flexibility to sequence the key instruments
in accordance with the market conditions. In the first phase (year 1), the focus
will be more on microfinance and small enterprise financing where SBP will
start implementing some key reforms while designing the future interventions.
The second phase (years 2-5) will focus on rural financing and low income
housing. Capacity building, change management, gender, and outreach to the
marginalized poor will remain the cross cutting areas in the FIP.
1.9 While the country risk for Pakistan remains relatively high, the lead partner
risk, given the commitment of the SBP as discussed above, is moderate
(medium / low). A change in SBP top level leadership would bring uncertainty
to the programme implementation3. The main institutional risk is that
institutional capacity among financial service providers does not increase. The
key social hurdles for FIP are financial illiteracy and patriarchal mindsets. The
various capacity building elements of the FIP as well as wider focus on
financial literacy aim to mitigate these risks. The key country risks relate to:
continued support from the
Government to financial sector reforms;
macroeconomic stability, and slowing of growth; political instability which
might itself slow the Government’s ability to further financial sector reforms;
and widespread unrest as relatively briefly witnessed in the aftermath of the
assassination of former Prime Minister Benazir Bhutto. Given these key risks
the overall risk is rated as Medium.
2.
PROJECT DETAILS
2.1
Project Description (What are we doing?)
2.1.1 The Goal of the FIP is inclusive economic growth and improved
livelihoods opportunities for poor and marginalised groups in Pakistan. The
Purpose of the FIP is improved access to financial services for poor and
marginalized groups and for small enterprises in Pakistan.4
2.1.2 Pakistan’s over 6% economic growth in the past four years has helped
reduce poverty, though 24% of the population, or 36 million people, still live
below the poverty line. A similar number of people are living slightly above the
poverty line. The success of the reform process in the banking sector is
indicated by the reduction of the state’s participation in the sector from over
80% in 1990 to less than 20% today. This has resulted in the doubling of
banks’ total assets since 2000, stronger capital adequacy ratio and lowered
non-performing loans from a high of around 20% in 1990/2000 to 6%
currently. The microfinance sector also improved its performance and
outreach: the sector has grown by about 25% per annum and now reaches
approximately 1.2 million clients.
2.1.3 Despite these positive developments, Pakistan’s financial sector has
not yet reached sufficient breadth or depth. The banking sector serves only
around 3m borrowers (3% of the population) compared to 20m depositors,
and the credit to GDP ratio is only around 30%, compared to over 40% in
India, 50% in Indonesia and 75% in Thailand. The majority of the poor,
particularly in rural areas, have no access to financial services, less than 15%
of the population have bank accounts, credit distribution is uneven, and many
distortions exist in the rural, agricultural, housing and small enterprise
financial services markets.
2.1.4 The impressive growth record has therefore still a long way to go
before the persisting inequalities between regions, classes and genders are
3
The first 3 year tenure of the SBP Governor will finish in December 2008. The Governor can be
appointed for another 3 years after that.
4 It should be noted that the poor and marginalized groups include the great majority of the rural
population who are subsistence farmers, and are currently excluded from microfinance and small
enterprise finance.
reduced. In this scenario, women stand out as being particularly marginalised.
They are among the poorest and the most vulnerable groups.
2.1.5 While keeping its focus on supporting sustainable and inclusive
growth, FIP will mostly benefit the poor, small entrepreneurs, women and
marginalized communities. It is estimated that the FIP interventions will
expand the number of microfinance clients from the existing 1 million to
3 million by the year 2010 and to 5 million by the end of the programme.
2.1.6 DFID funds will be spent on the following five components (please see
“Funding” at page 23 for a budget breakdown between each phase including
the financing provided by SBP):
a) Technical Assistance:
(Financial Inclusion Policy; SBP and PMN
Capacity Building; Financial Literacy; Leveraging
Technology; Credit Information / Rating; Remittances;
Monitoring and
Evaluation)
£10M
b) Credit Enhancement Facility
£10M
c) Financial Innovation Fund
£10M
d) Guarantee Scheme for Small Enterprise
and Rural Financing
£10M
e) Institutional Strengthening Fund
£10M
2.1.7 Within each component, there are sub-components that constitute
interventions of four different types which will include i) fact finding and
assessment; ii) strategies and policies; iii) capacity building and iv) funding
mechanisms. The programme will be implemented in two phases.
Elements of financial sector inclusion under FIP
2.1.8 Keeping in mind the international experience of financial sector
development and the state of Pakistan’s financial sector, FIP focuses on
market based sustainable financial services to the poor and the lower end of
the market. In the SBP microfinance strategy paper, the point is made that
Pakistan believes that the primary and most appropriate microfinance market
is people living in the segments just below and just above the poverty line.”
The FIP is therefore targeted at the 29.5 million adults classified as Transitory
Vulnerable and Transitory Poor, rather than the 5.6 million classified as
chronic poor and extremely poor. There are other programmes on cash
transfers and social protection which target these poorest segments. Key
outputs of the programme are listed below:
a) Well targeted financial inclusion policy: FIP will help SBP and
the Government of Pakistan to develop evidence-based, coherent
and well targeted financial inclusion policy in conformity with
Pakistan’s PRSP and sustainable growth strategies. In addition to
the policy development, this component will strengthen SBP’s
capacity on regulation, corporate governance, procurement,
development finance and programme implementation. FIP is a
policy programme which will encourage microfinance institutions
and banks to focus on expanding outreach of financial services to
women. SBP will have a strong gender focus within its
Development Finance Group.
b) Credit Enhancement: In order to reach the FIP targets, it is
estimated that the microfinance providers will require timely and
predictable availability of over 75 billion Pakistani Rupees (£600m)
in next three years. The private commercial banks are not yet ready
to directly finance the lower end of the market. At the same time,
SBP does not support a policy of directing the market. FIP
interventions will therefore facilitate partnerships between
commercial banks and microfinance institutions. Apart from a
number of interventions to facilitate these partnerships to mobilise
higher resources, FIP will support structuring of a market based
Credit Enhancement Facility of approximately £75m where DFID
will provide a grant component of £10m to offer first loss guarantee.
DFID will transfer these funds to SBP which will only be called if
required. It is expected that this contribution from DFID will provide
confidence to the financial institutions to provide the remaining
amount. At the end of five years, the unutilized DFID funds will be
spent as technical assistance through an agreed programme with
SBP on inclusive finance in Pakistan. SBP is commissioning a
detailed feasibility of the Credit Enhancement Facility and exit
strategy for DFID grant financing. The liquidity situation in the
financial sector will be a key factor for launching Credit
Enhancement Facility. In order to cover this risk, SBP is working on
a short-term alternate financing window for microfinance
institutions.
c) Sector transformation and institutional strengthening: FIP aims
to transform the microfinance sector from its reliance on state
subsidies to market based, sustainable and inclusive financial
services. It’s a big step for the GoP which has been providing
subsidies to the financial intermediaries working on the lower end of
the market. Under FIP, the Government has agreed to disinvest
their share in Khushali Bank (the largest microfinance bank in
Pakistan) and also converting the large state owned National Rural
Support Programme in to a microfinance bank. An Institutional
Restructuring Fund has been proposed for this purpose. This fund
will provide funding to Kashf Bank and First Women Bank who have
a direct focus on financing to poor women. The fund will also invest
in strengthening systems and human resources capacity of the
financial sector intermediaries for efficient and cost effective
delivery of financial services to the poor.
d) Innovation and delivery mechanisms: FIP will support a Financial
Innovation Fund to address the supply side issues of financial
innovation. Main focus of the Innovation Fund will be to support
technology based affordable financial services and to encourage
innovative schemes to reach out to marginalized groups in rural
areas. The proposed fund will be managed by private sector
professionals with adequate fund management and development
expertise.
e) Small Enterprises, Rural Financing: The continued low levels of
financing to small enterprises and rural population pose several
challenges to sustainable growth in Pakistan. FIP proposes to build
on the existing work in these areas done by the Small and Medium
Enterprises Authority and SBP. FIP will support in-depth analysis of
different approaches to enhance market based solutions to improve
financing to small enterprises and rural areas. In addition to
evaluating effectiveness of credit guarantees, FIP will look at
innovative options of venture capital financing and possibilities of
replication of credit union models in Pakistan. Remittances play a
significant role in poverty reduction in Pakistan, and have the
potential to do substantially more. Officially recorded flows totalled
$5.5 billion in 2007, or 6.4% of GDP, and are projected to be more
than $6 billion in 2008. In addition, FIP will contribute to anti money
laundering efforts by supporting formal, regulated mechanisms for
remittances and by building the Know Your Customer capacity in
the banking sector. FIP also has the scope to further explore the
documentation of individuals by expanding the outreach of National
Identity Cards. FIP will facilitate interventions for cost effective and
productive uses of remittances and Islamic Banking products for the
poor.
f) Financial literacy: Financial literacy and communication is a key
part of the programme to create awareness about access to
financial services, consumer rights and productive use of finances.
The communication strategy will ensure regular dialogue among the
key stakeholders with a particular emphasis on policy dialogue
between the financial sector policy makers and the private sector
both at local as well as the regional levels.
(Please see Annex-I which summarises the architecture of FIP.)
2.2
Project Programme Appraisal (Why are we doing it?)
Background
2.2.1 DFID has supported key analytical pieces focusing on financial
inclusion issues which provided an opportunity for a meaningful policy
dialogue with the Government and other stakeholders. DFID provided funding
for Poverty and Social Impact Assessment of Microfinance in 1997 and the
ongoing household survey on Access to Finance. Following the continued
dialogue, the Government of Pakistan formally requested DFID for assistance
of £50m to the SBP led Financial Inclusion Programme (Letter from the
Government attached as Annex-II). After the approval of the Programme
Concept Note (PCN), DFID has been involved in a series of meetings with key
stakeholders and has closely worked with the State Bank of Pakistan and
Pakistan Microfinance Network in developing Pakistan’s Microfinance
Strategy Paper in 2007.
2.2.2 Over the past ten years, DFID has supported key microfinance
providers like the Kashf Foundation and Rural Support Programmes. DFID
has also supported the Pakistan Microfinance Network (PMN) which has
demonstrated its role by conducting quality analytical reports, policy
influencing and networking with international partners. PMN is also leading on
the ongoing “Access to Finance” household survey” which has been jointly
funded by DFID, World Bank and SDC. The evaluation reports of Kashf
Foundation and PMN have suggested the need for developing a sector
programme to scale-up successes of these programmes.
2.2.3 The programme fully supports Pakistan’s Poverty reduction Strategy
Paper-II and enjoys support from the highest levels of the Government. As
mentioned above, the Prime Minister of Pakistan approved the
Microfinance Strategy Paper presented by the SBP Governor in 2007.
(Minutes from the Prime Minister’s office are attached as Annex-III).
2.2.4 Financial inclusion is therefore a major focus of Pakistan’s poverty
reduction strategy. The GoP recognises that in order to achieve long term
sustainable growth and poverty reduction, wider access to finance by the
lower end of the market is essential. The inclusiveness and the
sustainability of Pakistan’s economic growth require more reforms backed
by specific actions targeting those left behind. State Bank of Pakistan has
developed a number of strategy papers on financial inclusion in past one year
which include:

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a comprehensive strategy and a time-bound action plan to expand
outreach of financial services to the poor in the microfinance sector;
concept note on small and medium enterprise finance – a policy
paper is under preparation;
a draft strategy for increase in agricultural credit, developed by
consultants engaged by DFID;
a concept note on a rural finance strategy;
an action plan for housing finance;
a concept note on the pooling for wholesale funds for microfinance;
a note by the Governor on Islamic banking.
2.2.5 FIP conforms to DFID’s corporate focus on supporting growth and
developing inclusive financial markets through encouraging innovation,
leveraging technology, facilitation of stakeholders’ dialogue and policy
focused analytical work. The programme outcomes will directly contribute
towards achieving the Millennium Development Goal-1, to reduce income
poverty by half by 2015.
2.2.6 In DFID’s Performance Framework (2007-8), goal 1 focuses on
increasing incomes of the poor. Under this, goal 1.1 is stated as “to improve
income, employment and access to finance opportunities for the poor
and very poor”. FIP has been designed to make a direct contribution towards
achieving goal 1.1.
Approach
2.2.7 The key policy focus of FIP is on the provision of efficient and equitable
market based financial services to the poor. In order to make it more
manageable the programme will be implemented in two phases. The first
phase, which will last one year, will see the full articulation of the
implementation plans for the financial inclusion strategy, the design and
launch of projects to improve the enabling environment, and the initiation of a
number of sub-projects with a particular focus on microfinance and small
enterprises financing. These efforts will continue in the second, four year
phase. In addition, subject to Steering Committee and donor approval, a
number of complementary funds and programmes designed in the first phase
will be launched from Year 2. These include a long term Credit Enhancement
Facility, a Financial Innovation Fund, and a financial literacy strategy. More
actions will also be taken in the second phase on financing for small
enterprises, rural and agricultural finance and low income housing finance,
alongside microfinance.
2.2.8 Financial sector policy makers, donors and International Financial
Institutions have supported expansion of financial services to the poor through
supply driven traditional models in Pakistan. For instance, World Bank has
provided support for the creation of Pakistan Poverty Alleviation Fund (PPAF)
as an apex funding organisation, whereas, the Asian Development Bank
(ADB) has supported establishment of Khushali Bank – the largest
microfinance bank in Pakistan. These interventions have had some impact but
have not really contributed to the issue of achieving scale in a sustainable
manner. FIP is transformational in nature as it has managed to influence
the policy makers to move away from subsidies and to look for
commercially sustainable solutions. As a result, the Government did not
only decline to take a $300m subsidised line of credit from ADB for Khushali
Bank but also agreed to restructure the state funded National Rural Support
Programme into a microfinance bank. For the first time, FIP has developed an
evidence based policy and a realistic target of reaching out to 3.0m
microfinance users by the end of 2010. In addition, the programme will go
beyond the provision of microfinance and small enterprises financing by
exploring innovative interventions in the sub sectors of rural financing,
remittances, Islamic banking and low income housing. A key element for the
success of the programme will be a productive partnership between the
strong commercial banking sector and microfinance providers.
2.2.9 The key stakeholders of the financial inclusion programme include the
poor and marginalised groups, financial sector policy makers, microfinance
providers, commercial banks, donors and IFIs. During the concept
development and design phases of the FIP, comprehensive consultations
took place with all stakeholders and international experts. The FIP enjoys
support from all key stakeholders in Pakistan as well as international partner
organisations like the Consultative Group to Assist the Poor (CGAP) and
Grameen Foundation. Please see attached list of consultations as Annex-IV.
Economic Appraisal
2.2.10 Financial sector development – general benefits: Financial sector
development enhances economic dynamism in various ways:





By mobilising savings and improving access to credit it facilitates
higher levels of investment.
By facilitating inflows of foreign capital (including Foreign Direct
Investment (FDI), portfolio investment and bonds, and remittances)
it increases the total amount of capital available for investment. A
better regulatory framework would also improve the return on
remittances by providing incentives for productive investments.
By increasing the amount of capital available to the economy (both
physical and human), and by increasing the rate of technological
progress that such capital then makes possible.
By facilitating the entry of new firms and the expansion of existing
firms. The potential entry of new firms potentially increases
competition which leads to higher productivity, efficiency and
equitable pricing to consumers.
Indirectly through the above channels, by increasing the productivity
of capital.
2.2.11 A well-functioning financial sector can also help to reduce poverty.

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
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By making bank accounts more widely available, enabling the
secure accumulation of funds.
By enabling more poor people to borrow funds for investment in
productivity-enhancing new ‘technologies’ or in education and
health.
By reducing the vulnerability of poorer households through
minimising the impact of income shocks.
By decreasing the proportion of low-risk, low-return assets, as well
as stocks of cash held by households for precautionary purposes.
By failing to keep with inflation, these assets reduce purchasing
power in medium term.
2.2.12 The potential benefits of the FIP to Pakistan: The empirical
evidence on microfinance and the literature on financial sector development
indicate these can have a significant impact on growth and poverty reduction.
Furthermore the large gulf between Pakistan’s performance in the sector and
the benchmarks suggested by regional comparator countries supports the
expectation that the benefits from the FIP can be considerable in terms of
both economic growth and poverty alleviation. China, for example, has
achieved a level of financial depth which is three times that of Pakistan.
Equally significant is the point that Pakistan “wastes” a significant portion of
the finance that the financial sector intermediates. Engagement with formal
financial sector also helps improve human capital as entrepreneurs learn
better managerial skills leading to higher transparency and accountability in
the firms.
2.2.13 Purpose of FIP’s interventions: The FIP’s interventions are designed
to help overcome the problems that arise from market failures; to improve the
sector’s institutional and regulatory arrangements; and to improve the other
elements of financial sector infrastructure upon which financial market
development depends. For example:
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The credit rating bureau and credit rating mechanism will help
overcome informational asymmetries inherent to the financial
sector.
The financial innovation fund will help to overcome informational
asymmetries and capital market failures.
The HR development, technology and information dissemination
components, and the financial sector literacy strategy, will help to
overcome information and coordination failures; it is also expected
that, through HR development, the FIP will generate 20,000 new
professional jobs.
The credit enhancement facility and credit guarantee scheme will
help to ameliorate capital market imperfections.
The capacity building components will contribute to an improved
regulatory environment for the sector.
2.2.14 Quantification of benefits: The FIP has set various targets for
increased access to micro-finance. These include additional microfinance
institution clients, from one million to three million by 2010; and increased
small enterprise clients, from 168,233 to 418,617 by 2012.
2.2.15 A first approach to benefit quantification would recognise that the
interest rates charged by microfinance providers will be substantially less than
effective rates charged by informal sources. This will be so even though the
FIP, with the objective of promoting the sustainability of micro-finance
provider, aims to increase microfinance interest rates to cost-recovery levels.
This could imply an increase in rates from 18 per cent to 30 per cent – rates,
however, that are substantially lower than effective rates charged by informal
sources, which can range from 80 per cent to 120 per cent.
2.2.16 If it is assumed:
a) that the average amount of loans per client remains unchanged i.e., at Rps 9,438 (or £76) and Rps 2.3 million (£18,208) in the case
of microfinance institution and small enterprises clients,
respectively, and
b) that half of the additional microfinance institution and small
enterprises borrowers are first-time borrowers, i.e., that they were
not previously borrowing from informal sources
then the estimated net present discounted value of the interest savings
streams is Rps 91.9 billion (£734.9 million) for microfinance institution clients
and Rps 2,643.7 billion (£21.1 billion) for small enterprises clients.5
2.2.17 Further details and a sensitivity analysis assuming varying proportions
of first-time borrowers are presented in the economic appraisal at Annex X.
2.2.18 As FIP will be managing a structural transition from state sponsored
subsidised provision of financial services to the lower end of the market to a
commercially sustainable financial sector, there are risks of financing gaps
and exclusion of some groups in the short term. The private sector owned
microfinance institutions and microfinance banks might focus more on
commercially viable transactions in the urban areas. For this purpose, FIP will
encourage other programmes and community investment funds to meet the
needs of groups with a potential to be excluded from the formal sector. FIP
will specifically develop strategies for excluded populations in Balochistan,
NWFP and Sindh provinces as well as Azad Kashmir.
Social Appraisal
2.2.19 Pakistan, with its population of about 160 million, ranks 136 th (out of
177) on the latest Human Development Index.6 The positive macro economic
developments in recent years have unfortunately not translated into a
significant reduction in poverty. In fact, regional, social and income-based
inequalities persist. Within the continuing inequalities, women stand out as
being the most marginalised as they are among the poorest and the most
vulnerable groups in Pakistan.7
2.2.20 Against this backdrop, FIP is an outcome of the recognition by the GoP
that sustainable growth and poverty reduction cannot be achieved if the
neglected segments of the population, i.e. the poor and the marginalised, are
not included in the process. FIP is fully aligned with the PRSP I, which is
supported by DFID’s Country Assistance Plan (CAP). It directly contributes to
MDG 1: Reduce Income Poverty and will indirectly contribute to MDG 3:
Promote Gender Equality and MDG 5: Improve Maternal Health. FIP may also
indirectly contribute to MDG 2: Achieve Universal Primary Education.
5.
6
A discount rate of 9.04 per cent is used – the rate on long-term government bonds.
Human Development Report, (2006-7) UNDP.
7 Pakistan Poverty Assessment, (2003) GoP, undertaken with DFID support.
2.2.21 FIP will focus on the Transitory Vulnerable and Transitory Poor, living
just above and just below the poverty line. The target group of poor men and
women is very diverse and includes agricultural labour/small farmers,
domestic workers, construction labour - skilled and unskilled, small vendors,
small shop keepers, home based cottage industry workers, many of whom
happen to be illiterate, women and living in far flung areas.
2.2.22 Various studies8 have highlighted the concerns of the target
beneficiaries of FIP and have been incorporated in the design. The nationwide
Access to Finance survey (final report expected in July 2008) will provide
important insights into individual and household behaviour including the
psychological barriers to accessing financial services. Preliminary findings
have been taken account of as will the final survey. It will be used to set
baselines and targets for the programme and future surveys will be used to
monitor progress.
2.2.23 There is also evidence of the potential benefits of microfinance to the
poor, especially women, which will be further built upon in FIP. Specifically,
FIP will: i) encourage the development of focused and poor client-friendly
financial services to encourage the poor to save or borrow through formal
channels; ii) help poor people become more financially aware; iii) reduce poor
people’s vulnerability to shocks through savings, insurance schemes, access
to credit and resulting increase in durable assets base; iv) bring relative
improvements in household nutrition in-take and access to health; and v)
bring relative improvements in women’s decision making role within the
household by reducing their financial vulnerability.
2.2.24 In order to ensure that the above benefits to the poor are realised,
certain issues need to be addressed. For example: i) Links between village
level savings and the new microfinance banks need to be carefully explored to
retain poor people’s trust. ii) Financial illiteracy and patriarchal mindset are
two major hurdles for poor male and female clients in accessing financial
services. iii) Branchless banking could further alienate the poor people,
especially the already marginalised.
2.2.25 Key interventions under FIP, to address such issues include:
1. Capacity building of relevant departments within SBP in gender
based performance analysis and development of key indicators to
assess how financially inclusive microfinance banks are. It has
been recommended under FIP that SBP acquires the services of a
long term gender expert.
8
-Poverty and Social Impact Assessment: Pakistan Microfinance Policy, May 2006, OPM;
-A. C. Nielson, 2007, Pakistan Access to Finance: Focus Group Report, PMN;
-Hussein, M & Hussain, S., 2003, Impact of Microfinance on Poverty and Gender Equity,
PMN.
-Kashf Impact Assessment, 2005, Kashf Foundation;
-Salman, Asim, 2007, Challenges in the Microfinance Sector of Pakistan.
2. SBP to encourage a more pro-active approach by MFBs to invest in
staff at the middle management and field level, through gender
friendly incentives and work options.
3. Partnerships between MFBs and other NGOs/private sector actors
to promote business development services and non-financial
services, with a particular focus on financial literacy and consumer
protection.
4. The approval criteria for the Financial Innovation Fund and
Institutional Strengthening Fund will take account of gender equality
issues and any specific actions and monitoring indicators will be
added to the logframe Annex-V. A full Social Appraisal can be
found at Annex-VIII.
Institutional Appraisal
2.2.26 The programme appears feasible in the institutional context, although
there are major challenges which the programme design aims to address. The
financial sector is mostly (about 80%) managed by the private managers, thus
reducing the risk of state interference. Banks and microfinance institutions
have also been successfully building their institutional capacity for several
years, and there appears to be a relatively low risk that this process will not
continue. There is already considerable capacity among banks and
microfinance institutions, though not sufficient for the achievement of all the
objectives of the FIP. There are capacity building elements in several subcomponents of the programme to help address this.
2.2.27 In particular, apex funding organisations like the Pakistan Poverty
Alleviation Fund (PPAF) and state sponsored microfinance institutions such
as NRSP, Kushhali Bank and First Women Bank will face challenges
increasing their client base and moving to a more market based approach.
Through the Institutional Strengthening Fund (ISF) the FIP will provide a
considerable amount of support to implement restructuring plans and
strengthen the institutions so that they can become more sustainable market
based accessible finance providers. The existing microfinance instituions are
already convinced of the benefits to them of the reforms to the extent that 4 of
the 5 identified financial outfits (Kashf, NRSP, Kushhali Bank and First
Women Bank) have drawn up restructuring plans and sent them to the SBP.
The Pakistan Poverty Alleviation Fund has yet to provide restructuring plans.
2.2.28 As the lead institution, the capacity of State Bank of Pakistan is vital to
the success of the FIP. International analyses suggest the SBP is a relatively
capable institution. The FIP, led by the State Bank, enjoys strong ownership
from the top level economic policy makers and key stakeholders. SBP has
demonstrated its commitment and capacity to implement this large initiative.
DFID support for SBP capacity building will further strengthen their
governance and programme management abilities. In particular an
assessment of the SBP’s procurement capacity and the provision of support
where necessary will be carried out in phase 1 of the project.
2.2.29 There is a need for fuller analysis and design of some of the capacity
building programmes, such as credit information bureau and credit rating
agency innovations. This is incorporated into the programme itself.
Political Appraisal
2.2.30 The design of the programme reflects good understanding of the
political dynamics of the country, but, given the country context, substantial
residual political risk remains.
2.2.31 Building a more inclusive financial sector requires a continued
commitment to sector reforms. However the current government and the SBP
have shown strong commitment to financial sector reforms and to achieving
the goals of FIP. Current investment and expenditure programmes are
showing some focus on the poor. Whilst there may be changes at the top of
government following the elections, none of the major political parties have
indicated they would reverse these agendas.
2.2.32 However there is a significant chance of major constitutional and
political upheaval in Pakistan leading to instability and insecurity, for example
following disputed elections. This would threaten the progress of the FIP in
the short term, although it is likely the FIP would be able to continue when the
upheaval settled down. SBP independence is likely to mitigate this risk. See
risks section for more details.
2.2.33 FIP therefore aims to economically empower those people just below
and above the poverty line, giving them more control over their lives and
futures. However this programme does not per se strengthen the voice of the
poor in policy decisions, there are other programmes which aim to contribute
to that.
Environmental Appraisal
2.2.34 Potential risks and benefits to the environment will depend on how
individuals, businesses and institutions ultimately use their grants and loans.
Some of the risks could include:
2.2.35 Increased pollution and contribution to global warming; soil
erosion/ecosystem damage; increases in environmental pollution; Increases
in environmental damage or fuel / utility costs for house owners if housing
loans are advanced against poorly designed structures. (Housing must
conform to minimum specifications of the approved building codes of
Pakistan).
Potential benefits and opportunities include:
2.2.36 Improvements in environmental policies of microfinance institutions,
commercial and State banks. This could include aspects of environmental
accounting, due diligence and risk analysis. There may also be potential for
combining cleaner and more efficient uses of energy with the innovative
technologies and services to be funded through the Financial Innovation Fund
and for using carbon financing for cleaner technologies. FIP may also bring
the benefit of reduced vulnerability to shocks (environmental and economic).
2.2.37 To manage environmental risks and opportunities, environmental
screening and policy development should be included in the approval
processes of the various funding mechanisms under FIP and specific
appropriate actions integrated into sub-project development and design.
2.2.38 After the first year of the programme (Phase 1) specific environmental
actions will be integrated into the log frame as appropriate. The Environmental
Screening Note (ESN) is attached as Annex-VII.
2.3
Lessons & Evaluation
2.3.1 DFID has provided £8.9m financial support to Kashf Foundation since
2004 and £1.0m to Pakistan Microfinance Network (PMN) since 2005. As a
result of these interventions, around 300,000 women are now using
microfinance services through Kashf. A series of PMN policy papers have
helped develop understanding of issues and best practices to improve access
to financial services to the poor. The key lesson from these projects have
been the change of the aid instrument from project funding to a more strategic
sector wide approach to develop a more inclusive financial market in
partnership with the SBP.
2.3.2 The key analytical pieces like the Poverty and Social Impact
Assessment (PSIA), Country Level Effectiveness and Accountability Review
(CLEAR) and the ongoing access to finance survey have indicated that
Pakistan needs a step change in its approach to improve financial inclusion
from state supported financial services to productive partnerships between the
commercial financial market and microfinance providers.
2.3.3 In addition to improving the policy and regulatory environment, the
need to focus on long term predictable financing, investments in technology
based innovations and strengthening the capacity of microfinance providers
has also emerged as a key lesson from our engagement with stakeholders.
Keeping in mind the foreign exchange volatility risk, it has also been felt to
focus on raising funds from local resources rather than looking at international
funds.
2.3.4 Key lessons from the World Bank funding for PPAF and ADB’s budget
support to GoP’s Access to Finance Programme have been incorporated in
our FIP design. These lessons include the risks relating to foreign exchange
volatility, limitation on subsidised financing, weak governance of state owned
financial institutions, and most importantly the need for mainstreaming
microfinance with the private financial sector.
2.3.5 The FIP has consciously focused on the ownership and capacity of the
partner organization and the market intermediaries. This has substantially
reduced the partner risk and transaction cost for DFID as SBP does not only
fully own the programme but has also appointed a well qualified team to
manage this programme. A formal process of stakeholder consultation has
been developed to ensure participation of all players for successful
implementation of the programme.
2.3.6 International experience has shown that different successful models of
financial service delivery to the poor are not necessarily suitable in all
economies. The stages of market development and political economy play a
key role in determining the right interventions. Keeping in mind the “one size
does not fit all”, FIP has been tailored in conformity with the local market
conditions and political; sensitivities to issues like the interest rates and
resistance to change by the state sponsored providers.
3.
IMPLEMENTATION (How are we doing it?)
3.1
Management Arrangements
3.1.1 DFID will initially be the sole donor to FIP. KfW is involved in further
feasibility work on the credit enhancement facility and may provide additional
financing for it. Should KfW or other donors join FIP, we will aim to agree a
single reporting format.
3.1.2 Within DFID, the Finance and Growth Team Leader and Deputy
Programme Manager, Governance and Growth will be responsible for
managing implementation.
3.1.3 FIP will be managed through a steering and a technical committee. The
steering committee will focus on high level strategic issues and decision
making. Its membership will include Governor SBP and representatives from
DFID. The Technical Committee will address more routine technical and
management issues throughout implementation of the programme. Its
membership will include SBP officials, experts from the market and the
concerned Fund Manager/TA Consultant.
3.1.4 In addition, the SBP has already set up a FIP coordination office (the
Development Finance Group) which it is proposed becomes the main body
responsible for internal monitoring and reporting. The monitoring function will
also have independent oversight structures of funding instruments like the
Financial Innovation Fund and Credit Enhancement Facility. FIP will promote
a public-private partnership structure for wider ownership and effective
implementation.
3.1.5 Full terms of reference, taking account of how each committee / office
will relate to the other will be agreed early in the programme. A short term
expert will work with the SBP to review and build on existing management
structures as well providing on the job training and practical support to the
early stages of managing the programme. Below is a diagram illustrating the
management structure of FIP:
Steering Committee
FIP Secretariat
Technical Committee
TA
Programme
Financial
Innovation
Challenge Fund
Contractor
Manager
Credit
Enhancement
Fund
Management
Board
Fund Manager
3.2
Small
Enterprise
Guarantee
Qualification
Committee
Institutional
Strengthening
Fund
Board of
Directors
Executive Directors
Timing
3.2.1 This is a five year programme starting in 2008 and ending in 2013. It is
to be implemented in two phases:
Phase 1: Analysis and planning, with some funding of key components.
3.2.2 This will run for the first year of FIP and will include all the surveys and
assessments and most of the strategy and policy sub-components. It will also
include some implementation initiatives focused on microfinance and TA to
the SBP.
Phase 2: Implementation of the capacity building and main funding
programmes.
3.2.3 This will run from Years 2 to 5 of the programme and will take account
of the findings from phase 1. TA to the State Bank will continue and the
Institutional Strengthening Fund, Financial Innovation Fund, Credit
Enhancement Facility and Credit Guarantee Scheme for small enterprises
and the rural population will become operational.
3.2.4 Subject to the findings of phase 1 and agreement between SBP and
donors, additional funding mechanisms for remittances, credit information
rating, leveraging technology and rural and low income housing financing may
also be implemented during this phase.
3.2.5 The table below illustrates the phasing of key components of the
programme.
Phase 1
Year 1
Q1
Surveys,
assessments,
reviews,
implementation
plans
Capacity building
technical assistance
Credit enhancement
bridging facility
Credit enhancement
permanent facility
Credit guarantee
scheme
Financial Innovation
Challenge Fund
Institutional
Strengthening Fund
Credit information
Bureau
Credit rating
mechanism
Community
Investment Funds
Financial Literacy
M&E Framework
Strengthening PMN
Communications
Q2
Q3
Year
2
Q4
Phase 2
Year Year
3
4
Year
5
3.3
Funding
3.3.1 DFID will provide up to £50m for the programme over DFID financial
years 2008/09 to 2012/13. This can be accommodated within the Aid
Framework.
3.3.2 The estimated financing requirements for the whole programme are
around £51.5 million. In addition, SBP are providing another £5m (not
included in the budget below) for related programme management and policy
development work. KfW may contribute additional funds to the credit
enhancement fund.
Estimated financing requirement for the FIP, by Phase (£ sterling):
Phase 1
Yr 1
Item
Technical assistance
Fees
Reimbursables
Total
SBP capacity building
600,000
200,000
800,000
150,000
Surveys
Islamic KAP study
Access to Finance
Funding mechanisms
Leveraging technology
Remittances
Credit information/rating
Credit enhancement
Credit guarantees/rural
financing
Financial Innovation Fund
Institutional strengthening
(including £1m for PMN
capacity building)
Programme Administration and
Monitoring and Evaluation
Total
Funding sources
Organisation
Phase 2
Yrs 2-5
Total
1,304,000
453,000
1,757,000
350,000
2,557,000
500,000
350,000
100,000
350,000
100,000
2,000,000
2,000,000 2,000,000
2,000,000 2,000,000
1,000,000 1,000,000
8,000,000 10,000,000
10,000,000 10,000,000
10,000,000 10,000,000
1,500,000 8,500,000
10,000,000
500,000 2,500,000 3,000,000
5,050,000 46,457,000 51,507,000
Financing
% share
DFID
50,000,000
97.3%
SBP
1,507,000
2.7%
3.3.3 The programme will be a mix of technical assistance procured by DFID
(the Financial Innovation Fund) and sub-sector financial aid to the State Bank
for their procurement of pre-agreed goods and services. Standard DFID
procedures will be followed including use of Crown Bank for making payments
to SBP for the financial aid.
3.3.4 Up to £10 million of DFID’s funds will be used for the credit
enhancement facility. DFID’s funds will be paid in tranches to a specific SBP
account where they will be held as a reserve to meet actual losses. A small
percentage of these funds may also be used to meet management costs of
the scheme as will any interest earned on DFID’s reserve. At the end of the
programme, any unutilized DFID funds will be spent as technical assistance
through an agreed programme with SBP on inclusive finance in Pakistan.
SBP is commissioning a detailed feasibility of the Credit Enhancement Facility
including options for how any unspent DFID funds could be used.
3.3.5 Up to £10 million of DFID’s funds will be used for a Guarantee Fund for
small enterprise financing. Under this arrangement, DFID’s contribution
would remain with DFID until called upon to meet actual losses.
3.3.6 Recipients of programme funds will be expected to contribute to and
where possible meet their full operating and maintenance costs. Sustainability
issues, including capacity to meet future running costs, will be taken account
of in the eligibility criteria and Terms of Reference for the various funding
mechanisms.
3.3.7 Unless agreed otherwise, assets purchased using DFID funds shall
remain the property of the recipient institution.
3.4
Contracting and Procurement
3.4.1 The programme will involve use of both State Bank and DFID
procurement systems.
3.4.2 Technical Assistance (TA): The TA components are to be procured by
the State Bank in the form of a single contract to an agency. DFID will be
involved in agreeing Terms of Reference and in monitoring performance.
DFID will need to approve the firm selected.
3.4.3 Credit Enhancement Facility: SBP systems (with DFID approval of the
final set up) will also be used to procure a separate fund manager for the
credit enhancement facility. The diagram below illustrates the flow of funds for
the credit enhancement facility
Flow of funds: Credit Enhancement Facility
SPV = Special Purpose Vehicle
SBP
Procurement and
set up
Funds
SPV
Reports progress
and outcomes
Reporting
Disbursement
Beneficiaries
DFID
3.4.4 Institutional Strengthening Fund: The State Bank will set up a separate
fund account and institutional arrangement under the Companies Act for
management of the Institutional Strengthening Fund. The same flow of funds
as for the credit enhancement facility above would apply.
3.4.5 A DFID approved procurement expert will work with the SBP during the
early stages of the programme to set up the procurement guidelines for the
TA, credit enhancement and Institutional Strengthening Fund components.
They will also work with SBP to develop a detailed timetable of the long and
short term TA inputs needed.
3.4.6 Financial Innovation Fund: The Innovation Challenge Fund and support
to PMN including the Access to Finance surveys will be provided in the form
of DFID consultancy contracts following standard DFID procedures.
3.5
Accounting/Audit
3.5.1 A single budget and accounting system will be used for the programme.
Payments will be made bi-annually on the basis of satisfactory workplans and
accurate financial reports showing the need for further funds. Annual audited
accounts will be required from each Fund and the SBP and DFID will reserve
the right for an independent audit.
3.5.2 DFID’s contribution for the Small Enterprise Guarantee Fund may need
to be accounted for as a contingent liability. DFID’s Accounts Department and
Programme Guidance Team will be closely consulted when the Scheme is set
up.
3.6
Monitoring and Reporting
3.6.1 Within the first half of Year 1, a Monitoring and Evaluation (M&E)
specialist, with the cooperation of the long term experts, will advise SBP on
the design and implementation of an M&E framework. The overall framework
will be approved by the Steering Committee, who may draw on the M&E
budget for independent advice and quality assurance of the framework.
3.6.2 The logframe and Access to Finance Survey will be key tools in
monitoring FIP. The Access to Finance survey will provide many of the
baseline indicators and a follow up survey in year 4 of the programme will be
used to measure progress against them.
3.6.3 The monitoring framework will produce regular reporting in a format
compatible with annual reviews. Short narrative reports detailing progress
against the workplan and logframe along with details of actual and forecasted
expenditure will be produced quarterly. This will be supplemented with a more
comprehensive annual report, to be received in advance of the annual review.
3.6.4 An independent mid-term evaluation will take place in year 3. This will
review what impact FIP is having, review it’s effectiveness, risks and
recommend any changes, including how they should be implemented and
monitored. Full terms of reference will be developed before the evaluation. A
programme completion review will take place in year 5.
3.6.5 Each component of FIP will be responsible for monitoring within their
sphere and providing information as required under the overall M&E
Framework for the Development Finance Group and management
committees. It is anticipated that the Development Finance Group in the SBP
will manage the overall M&E framework. That is, they will fulfil a coordination,
collation, quality assurance and evaluative role. Training will be provided by
the M&E and other consultants to ensure the relevant staff in each section
have the appropriate skills.
4.
RISKS
4.1
The overall risk rating is medium. The detailed risk assessment at
Annex-IX dictates that the project carries a large number of risks the most
serious of which tend to relate to the challenging political, security, and
economic environment in Pakistan. The growing strength of the financial
system in Pakistan, and the high quality leadership and staff of the SBP,
mean that mitigation measures can be put in place for most of the identified
risks.
4.2
Whilst we consider that we can make a reasonable assessment of the
risk now, it is worth noting that phase-1 of the project includes provision for
more detailed design of significant work-streams. The risk analysis should
therefore be revisited at the end of phase-1 when there will be more clarity on
the risks following the more detailed design work.
4.3
A formal fiduciary assessment was not carried out as the programme
does not involve budget support. Annex-IX includes more details on risks.
Overall the fiduciary risk, including the risk of corruption, is assessed as
moderate. The fiduciary risk for each main component is summarised below.
4.4
For the TA procurement the risk is moderate. The SBP has strong and
reliable procurement and expenditure management capacity, but less capacity
to monitor the quality of TA and its outputs. The TA would be procured by the
SBP with the participation of DFID as a single package from one consulting
firm or consortium. DFID would play a key role in the Steering Committee to
help SBP monitor the contract. The M&E component, the programme
management component, and the SBP capacity building programme would all
help build the SBP’s capacity to monitor the quality and outcomes of TA
contracts.
4.5
The contracting of the Financial Innovation Fund would be undertaken
by DFID directly therefore the fiduciary risk is low. The management of the
Credit Enhancement Facility and the Institutional Strengthening Fund would
be undertaken on behalf of SBP and DFID, at an arms length. Provided the
design of the PPP arrangements follows the strong expenditure controls of the
SBP, the fiduciary risk in terms of fund flow management should be moderate.
The fiduciary risk associated with the proposed structure of the credit
guarantee scheme is moderate given the results of the design team’s
assessment of the SBP-Banking Services Corporation.
4.6
The main economic risk is a significant economic slow down
meaning that financial sector growth slows. Given the current instabilities in
the global financial system, there is a significant risk of contagion in Pakistan.
This would have a high impact on the FIP, particularly in the short term. The
risk is mitigated through the medium to longer term impact of the programme,
which should still be effective when the slowdown ends, even if the
programme’s outcomes may be delayed.
4.7
The main political risk is that the Government of Pakistan would not
implement financial sector reforms. The current government is committed to
financial sector reforms. Even if there is a change of Government, then,
provided that government is relatively stable, there is little risk that the new
government will have a significantly lower commitment to such reforms. This
risk will be mitigated by the coherence of the policies and strategies being
developed by SBP and other institutions, a process which will in turn be
supported by Component 1 of the FIP.
4.8
However there is a risk that major constitutional and political
disruption which could slow the GoP’s progress on financial sector reforms.
Given recent constitutional and political disruptions the risk of future disruption
is high. This may mean some high level policy and strategy decisions being
postponed. But unless this leads to a significant deterioration in the law
and order situation the impact on FIP may only be medium. Some FIP
programmes can be implemented at a technical level even during periods of
disruption, as was the case during the late 2007 State of Emergency. The risk
can be mitigated by ensuring a flexible timetable for the implementation of the
FIP which allows technical changes to be made even while high level policy
and strategy decisions may need to be postponed.
4.9
The main institutional risk is that the institutional capacity of financial
service providers does not increase. Banks and microfinance institutions have
been successfully building their institutional capacity for several years, and
there appears to be a relatively moderate risk that this process will not
continue. If the capacity building process declines, the impact will be medium,
because there is already considerable capacity among banks and
microfinance institutions, though not sufficient for the achievement of all the
objectives of the FIP. The risk is being mitigated through capacity building
elements in several sub-components of the programme, with a major focus on
HR development and institutional strengthening, as well as through other
donor programmes supporting the building of capacity among financial
institutions in Pakistan.
4.10 The Steering Committee will have overall responsibility for monitoring
the FIP, including monitoring of risks at a strategic level. A regular
monitoring framework will be developed, reinforced by an Annual Output to
Purpose Review. One of the early tasks of the Technical Committee will be to
discuss and approve a monitoring and evaluation framework, including
monitoring of risks, developed with the support of a monitoring and evaluation
expert.
4.11 The FIP includes a credible programme to improve public sector
standards, including capacity building of the SBP.
5. CONDITIONALITY
5.1 There are no specific conditions attached to this programme. However, an
important underlying principle for the success of FIP is that the State Bank of
Pakistan and DFID remain committed to implementing it. If, during annual
reviews of the programme, or at another time, DFID and / or the SBP judge
that the programme is seriously off-track or under threat, the programme (or
component parts) may be suspended or terminated in line with DFID’s
standard procedures which will be set out in the Memorandum of
Understanding signed between DFID and the State Bank.
Annex I: The Architecture of the Financial Inclusion
Programme
Surveys and
assessments
Strategies and
policies
Capacity building
Funding
mechanisms
Component 1: Financial inclusion policy – development and management
(Macro level)
1.1 SBP corporate 1.5 MF strategy
1.9 SBP capacity
governance review implementation
building programme
plan
1.2 Financing
1.10 Regional
needs assessment 1.6 Small
financial inclusion
Enterprises
policy coordination
1.3 Islamic Finance strategy
KAP study
implementation
1.11 Coordination
plan
of sub-national
1.4 Access to
credit distribution
Finance Survey
1.7 Rural & agricult(second survey)
ural strategy and
implementation
plan
1.8 FSSP action
plan
Component 2: Financial innovation (Meso level)
2.1 Financial sector 2.5 Policy review:
2.6 Credit
2.8 Credit
stakeholder
small enterprises,
information bureau enhancement
analysis
rural, agricultural,
facility
housing
2.7 Credit rating
2.2 Leveraging
mechanism
2.9 Credit
technology §
guarantee scheme
for small
2.3 UK Pakistan
enterprises
remittance corridor
§
2.10 Financial
Innovation
2.4 Feasibility
Challenge Fund
studies on small
enterprises
2.11 Community
interventions
Investment Funds
Component 3: Improving delivery mechanisms (Micro level)
3.1 HR
3.3 HR
3.4 Promotion of
3.5 Institutional
development needs development
BDS
strengthening fund
assessment
strategy
§
Sub components 2.2 (leveraging technology) and 2.3 (UK-Pakistan remittance corridor) may
move on to strategies and policies, capacity building and even funding mechanisms, depending on
the outcome of investigations and scoping studies.
3.2 Reviewing
restructuring plans
Component 4: : Financial sector communications and financial literacy
(Sector Wide)
4.1 Financial
4.2Communications
literacy strategy
with stakeholders
4.3 FIP website
4.4 Dissemination
organization
4.5 Strengthening
PMN
5.1 Assessment of
SBP procurement
capacity
4.6 Donor
coordination
Component 5: Programme management
5.2 M&E framework 5.3 Support to SBP 5.4 Management of
in managing the
funds
programme
Annex II: Letter from Government of Pakistan
Annex III: Minute from Prime Minister’s office
Annex IV: Consultation Record
1. For the design stage - agree team members prior to development of the CN; define
clear roles and responsibilities, including managing the preparation and submission of
the CN and project documentation.
Programme Staff
Asim Khan, Programme Officer, Zoi Andrew
Deputy Programme Manager, David Taylor,
Programme Manager
Team Leader/Main Sector
Adviser
Haroon Sharif
Advisory Support/Cross
Cutting Advisers
Peter McDermott, Governance; Tim Green, Zahir
Dasu and Peter Balacs (consultant) Economics;
Aalya Gloekler (Consultant), Rabya Nizam and
Simon Narbeth, Social Development
Key Partners
State Bank of Pakistan (SBP)
Consultancy support for
design
Robert Stone, Team Leader (OPM)
Carolina Sanchez (OPM)
Jenny Hoffman (OPM)
Dr Muhammad Zubair Khan (OPM)
Dr Sarfraz Qureshi (OPM)
Karen Ellis (ODI)
Andreas Tarnutzer (SDC consultant)
Dr Azhar Saeed (SDC consultant)
2. Consultation checklist for proposals of £7.5m and above. To be used proportionally
for proposals between £1m - £7.5m):
Discipline:
Names of those
Date
Date
consulted
consulted
responded
Economics (Consultant to DFID- Peter Balacs
17/3/08
27/3/08
Pakistan)
Economics (DFID Pakistan
Advisers)
Zahir Dasu and
Hans Beck
18/4/08
28/4/08
Economics (Regional Adviser)
Roli Asthana
21/4/08
30/4/08,
13/5/08
Governance (DFID Pakistan
Adviser)
Peter McDermott
28/3/08
and
30/4/08
Early April
2008;
30/4/08;13/5/08
Governance (Regional Adviser)
Jackie Charlton
21/4/08
21/4/08,
13/5/08
Social Development (DFID
Pakistan Advisers)
Rabya Nizam and
Simon Narbeth
18/4/08
22/4/08 and
23/4/08
Social Development (Regional
Adviser)
Rebecca Calder
29/4/08
27/5/08
13/5/08
28/5/08
Monitoring & Evaluation /
Statistics (DFID Pakistan
Advisers) – Re: Logframe
Sarah Hennell
Benedicte Terryn
Dec 2007
28/4/08
Dec 2007
1/5/08, 22/5/08
Head of Programme Guidance
Group and FCPD
Dominic d’Angelo
(Head), Nicky
Cassidy, Ruth
Mustard
3/4/08
26/5/08
3/4/08, 24/4/08
Head of Accounts
Jackie McAllister
3/4/08
3/4/08
Policy Adviser FACCT
(Procurement issues)
Robert Hyland
31/10/07
31/10/07;
1/11/07
Senior Contract Officer,
Procurement Department
Graham McDonald
31/10/07
31/10/07
Financial Sector Team leader, Catherine Martin
Growth and Investment Group,
Policy Division
24/1/08
24/1/08
Enterprise Adviser
Xavier Lecacheur
December
2007
December
2007
Head of Profession, Private
Sector Development, Policy
and Research Division
Mavis OwusuGyamfi
May 2008
May 2008
Deputy Head of Evaluation Dept
- to quality assure logical
frameworks and provide
Julia Compton
1/5/08
(Deputy Head), and
John Murray (Head,
Relevant GDED Team(s) - refer
to Blue Book B5, Processes
and tools: Format for Project
Documentation, para 2.2
[identify Team(s) consulted]
12/5/08
comments in line with Blue
Evaluation and
Book B5, Processes and tools: Compliance)
Format for Project
Documentation, para 2.3.
Stakeholders: including
Government, Civil Society,
Other Donors, BE/ BHC – for
general comments
PMN
PPAF
Khushali Bank
RSPN
NRSP
FINCON
1,3,4/10/07
2/10/07
2/10/07
2/10/07
2/10/07
2/10/07
1,3,4/10/07
2/10/07
2/10/07
2/10/07
2/10/07
2/10/07
DONORS: (WB,
ADB, SDC, KFW,
USAID, IFC,
UNDP, EC, JBIC,
IFAD)
3/10/07
3/10/07
USAID, SDC,
Shorebank
31/3/08
31/3/08
KASHF
NIBAF
The First
MicroFinance Bank
& Shore Bank
ZTBL
Small and Medium
Enterprise Bank
State Bank of
Pakistan officials
(Karachi).
Orix Leasing
HBFC
Heads of Home
Remittance Cells of
leading Banks.
HBL
ABN AMRO Bank
First Women Bank
3/10/07
3/10/07
3/10/07
3/10/07
3/10/07
3/10/07
3/10/07
3/10/07
4/10/07
4/10/07
4/10/07
4/10/07
Credit
Enhancement:
(Shore Bank, IFAD,
PMN, Tameer
Bank, World Bank,
Kashf)
5-10/10/07 5-10/10/07
8/10/07
8/10/07
8/10/07
8/10/07
8/10/07
8/10/07
9/10/07
9/10/07
9/10/07
9/10/07
9/10/07
9/10/07
10/12/07
10/12/07
World Bank
RSPN, Small and
Medium Enterprise
Finance
Head of Spending
Department (as part of a DFIDPakistan Policy Forum including
other Senior Managers, Advisers
and programme staff)
Eric Hawthorn
Divisional Director
Jim Drummond
25/1/08
25/1/08
3. For all proposals that are politically sensitive, novel and/or contentious (regardless of
value):
Discipline:
Names of those
Date
Date
consulted
consulted
responded
Chief Economist
Responsible Heads of Profession
(identify by discipline)
Head of Information
Head of Department/Office
Foreign & Commonwealth Office
H.M. Treasury
Other relevant Whitehall
Departments (identify those
consulted)
I confirm that the necessary consultation process has been undertaken, that
papers have been circulated and all comments have, unless otherwise stated,
been taken into account in the final documentation.
Signed (Programme Staff): Zoi Andrew
Grade: B1(T/P)
Date: 26/05/2008
Annex V: Logical Framework
Note: some of the OVIs (marked with an asterisk *) will be derived from the Access to Finance Surveys, and the setting of the OVIs
needs to await the baseline figures to be established in the 2007 survey. The OVI dates in these cases are based on the assumption that
the survey will be conducted every three years – if the interval is different, then the OVI dates will need to be adjusted accordingly)
Narrative Summary
Objectively Verifiable Indicators (OVIs)
Means of Verification
Assumptions
Goal:
No exogenous shocks to
1. Inclusive economic
1.1 Declining percentage of population living 1.1, 1.2 GoP Economic
Pakistan
growth and improved
at risk of falling to or below Pakistan’s
Survey
livelihood opportunities for
poverty line
the poor and marginalised
1.1, 1.2 WB Poverty
groups in Pakistan
Assessment
1.2 A reduction in the national head count
poverty ratio.
1.1, 1.2, 1.3 Pakistan
Social and Living
Standards Measurement
1.3 Declining relative inequality in incomes
Survey (PSLSM)
and living standards, particularly of rural poor
1.1, 1.2, 1.3 Pro poor
Growth Index (based on
PSLM poverty module
data)
1.1, 1.2, 1.3 Additional
surveys commissioned
by SBP, GoP, other
donors and / or DFID on
Pro Poor Growth
1.3 GINI Coefficient
Purpose:
2. Improved access to
financial services for the
poor and marginalised
2.1 Number of microfinance borrowers
increases by at least 1 million a year to 3
million by 2010, and by at least 2 million a
year to 10 million by [2013]
2.1, 2.2, 2.3, 2.4, 2.5
FinScope Access to
Finance surveys; Data
from Pakistan
Political stability
Macroeconomic stability and
strong GDP growth
Narrative Summary
groups and small
enterprises in Pakistan.
Objectively Verifiable Indicators (OVIs)
2.2 Proportion of women with access to
formal or semi-formal financial services
increases by at least U% and V% per year to
W% and X% respectively by 2009 and Y%
and Z% by 2013*
Means of Verification
Microfinance Network,
SBP and bank reports
Assumptions
2.3 Proportion of young people with access
to formal or semi-formal financial services
increases by at least U% and V% per year to
W% and X% respectively by 2009 and Y%
and Z% by 2013*
2.4 Proportion of female managers in the
microfinance industry increases
progressively throughout programme*
2.5 Annual improvement of 10%* in outreach
of financial services to underserved areas
2.6 Small enterprise credit increases by at
least 1% per year from 15.4% to [18%] of
bank credit by 2010 and [20%] by 20129
2.6 Bank and SBP
reports;
2.7 Microfinance clients have interest
savings of up to US$50 million (£25 million)
in net present discounted value streams over
the programme period
2.7 FinScope Access to
Finance surveys; Data
from Pakistan
Microfinance Network,
SBP and bank reports
Risk Indicator (Steering Committee to
monitor):
2.8 Effective business policies are in place to
9
Credit to small and medium enterprises was 15.4% of bank credit in June 2007
2.7: (a) average amount of
loans per client remains
unchanged; (b) half of the
additional microfinance
borrowers are first-time
borrowers
Narrative Summary
Objectively Verifiable Indicators (OVIs)
support a favourable business environment
for small enterprises
Means of Verification
Assumptions
Output 1 - Macro level
Component:
3. Improvement in the
planning and
implementation of financial
inclusion policies, including
improvement in their
sectoral and geographical
linkages.
3.1 Integrated financial inclusion action plan
adopted by the Government of Pakistan by
[June 2009]
3.1 Govt of Pakistan and
SBP reports and policy
documents; Donor
reviews and evaluations
All Outputs to Purpose
3.2 Annual reviews of the operation of the
3.2 SBP reports; PMN
Development Finance Directorate report
reports
favourably on operations and on regional and
sub-regional linkages
3.3 Donor and Paris Declaration reviews
report improved alignment and
harmonization, including links with the South
Asia region and at the sub-national level
Risk Indicator (Steering Committee to
monitor):
3.4 The legal and regulatory framework
evolves to provide an enabling environment
for the growth of new financial sector
products and services
Output 2 - Meso level
Component:
4. Improvement in financial
sector infrastructure,
governance and the
development of new
products leads to
expansion in the breadth
4.1 At least [two] new products for small
enterprises and rural finance introduced and
successfully implemented by [2012]
4.2 At least [three] new products or delivery
3.3 Donor project
reviews and evaluations;
Reviews in the context
of the Paris Declaration
on Aid Effectiveness
3.4 GoP, SBP policies,
laws and regulations
4.1 small enterprise
surveys; bank returns to
SBP; SBP and PMN
reports; Govt of
Pakistan, SBP and / or
donor reviews and
studies
The financial sector continues
to grow while avoiding major
crises
Rapid development of the
communications infrastructure
Narrative Summary
and depth of financial
services
Objectively Verifiable Indicators (OVIs)
mechanisms for poor customers introduced
and successfully implemented by [2012], of
which at least one is particularly suitable for
women
4.3 New small enterprise credit reference
bureau in operation serving banks and
microfinance institutions by [2012]
Output 3 - Micro level
Component:
5. Financial institutions
provide financial services to
the poor, and financial
services are better
distributed across the
country
Means of Verification
Assumptions
4.2 and 4.3 PMN
reports; Access to
Finance Surveys; bank
and microfinance
institution returns to
SBP; SBP reports; donor
and / or Govt of Pakistan
reviews and studies
5.1 Small enterprise surveys show annual
decrease in barriers to financial access
5.1 Small enterprise
surveys
5.2 New SBP guidelines on corporate
governance implemented by banks and SBP
reporting on Corporate Governance,
including anti money laundering, rolled out by
[2012]
5.2 SBP and Bank
reports; ADB Access to
Finance Programme
reports
5.3 Improved human and institutional
capacity among financial intermediaries
serving the poor. Two new microfinance
banks established by 2010.
5.3 SBP banking
supervision department
reports; PMN reports;
Finscope Access to
Finance Surveys
5.4 X%* increase in outreach of financial
services in lagging regions of Balochistan,
NWFP and Sindh
5.4 PMN reports;
Finscope Access to
Finance surveys
5.5 Average time and cost of accessing
5.5 Finscope Access to
financial service outlets decreases by at least Finance Surveys; bank,
W% a year to [X]% by 2010 and [Y]% by
PMN and SBP reports
2012*
Narrative Summary
Objectively Verifiable Indicators (OVIs)
Means of Verification
Assumptions
5.6 Govt of Pakistan,
SBP and PMN reports
Output 4 - Sector wide
Component:
6. Financial literacy
increases, especially
among poor and
marginalised groups;
understanding of financial
access issues increases
among policy makers and
opinion formers;
communications between
key stakeholders, including
donors, is improved.
6.1 Financial literacy including awareness of
consumer protection laws improves
significantly by 2012, particularly in rural
areas.*
6.1 Finscope Access to
Finance Surveys
6.2 IFIs and other international observers
report improved quality of public debate on
financial access issues.
6.2 IFIs and international
observer reports
Activities
Component 1: Financial inclusion policy: development and management
1.1 Review of SBP Corporate Governance
1.2 Financing needs assessment
1.3 Islamic Finance Knowledge, Attitude and Practice (KAP) study
1.4 Access to Finance Survey (second survey)
1.5 Development of integrated implementation plan for the National Microfinance Strategy
1.6 Development of integrated implementation plan for the Small and Medium Enterprise Finance Strategy
1.7 Rural and agricultural strategy and implementation plan
1.8 Action plan for the Financial Sector Strategy Paper (FIP Chapter)
1.9 SBP capacity building programme
1.10 Recommend structure for a regional financial inclusion policy coordination
1.11 Coordination, assessment and monitoring of regional (sub-national) credit distribution
Component 2: Financial innovation
2.1 Financial sector stakeholder analysis
2.2 Leveraging technology: branch-less banking, mobile phone based banking, biometrics etc and
Assumptions
[For all components]
Security and law and
order situation does not
deteriorate
Continued commitment
by the Government of
Pakistan to implement
financial sector reforms.
Continued cultural
acceptance and popular
support for the principles
underlying the FIP
Activities
development of related legislation and regulation
2.3 UK-Pakistan remittance corridor: scoping study including innovative products like securitisation;
assessing infrastructural needs for facilitation of remittances & offering of Islamic Finance products; possible
Challenge Fund
2.4 Feasibility studies on small and medium enterprise interventions
2.5 Review and recommend changes in the structure of SBP policies for small and medium enterprise, rural
& agricultural and low income housing financing, and also recommend related implementation options.
2.6 Support the feasibility and action plan for setting up Credit Information Bureaus for the low income market
2.7 Feasibility and action plan for a credit rating mechanism for small and medium enterprises
2.8 Credit enhancement facility
2.9 Credit guarantee scheme for small and medium enterprises
2.10 Financial innovation challenge fund
2.11 Community Investment Funds
Component 3: Improving delivery mechanisms
3.1 Needs assessment for HR Development
3.2 Review restructuring plans of National Rural Support Programme, Pakistan poverty Alleviation Fund,
Khushhali Bank, First Women Bank and other institutions as required
3.3 Formulation and implementation of an HR Development Strategy
3.4 Promotion of Business Development Services
3.5 Institutional strengthening fund
Component 4: Financial sector communications and financial literacy
4.1 Development of financial literacy strategy for end users, particularly women
4.2 Communication with stakeholders, media and knowledge sharing
4.3 Support for the development of FIP website
4.4 Scoping for a new organisation for dissemination of financial information and policy support
4.5 Support for strengthening Pakistan Microfinance Network (PMN)
4.6 Donor coordination
Component 5: Programme Management and Environmental issues
5.1 SBP procurement capacity assessment
5.2 Monitoring and evaluation framework
5.3 Support to the SBP in managing the FIP programme
5.4 Management of funds
5.5 Consultation with appropriate Environmental authorities and /or review of relevant environmental laws
and policies
Assumptions
Continued commitment
to financial inclusion by
SBP management
Continuing acceptance
by stakeholders of the
leadership role and
responsibilities of SBP in
relation to financial
inclusion
Adequate financial and
technical support from
donor partners in the
implementation of the
FIP
The commitment of
banks and other
financial institutions to
provide accessible
financial services
continues to grow
Activities
5.6 Environmental screening and policy development included in the approval processes of the various
funding mechanisms and specific appropriate actions integrated into sub-project development and design.
5.7 After the first year of the programme (Phase 1) specific environmental actions integrated into the log
frame as appropriate.
Assumptions
Annex VI: Project Header Sheets
Project Header Sheet 1 – Financial Innovation Fund
A. PROJECT INFORMATION
Project primary details – Please refrain from using abbreviations and acronyms
unless they are truly worldwide known e.g. UN.
NEW/AMENDED PHS Amended PHS
AMENDED PHS – PLEASE ENTER
VERSION NUMBER 2
PROJECT STAGE
Implementation - Project Fully Approved
IF AT PLANNING STAGE, ENTER ESTIMATED PROJECT TOTAL COSTS £
PLANNED PROJECT DATES (MMYYYY) - START July-2008
PROJECT TITLE (50 CHARACTERS INCLUDING SPACES)
END
July-2013
PAKISTAN FINANCIAL
INCLUSION PROGRAMME
PROJECT PURPOSE
IMPROVED ACCESS TO FINANCIAL SERVICES FOR
POOR AND MARGINALIZED GROUPS AND FOR MICRO, SMALL ENTERPRISES
IN PAKISTAN.
INITIAL PROJECT RISK
Medium
LEAD ADVISER
HAROON SHARIF
PROJECT OFFICER
ZOI ANDREW
INITIAL ESN DATE MMYYYY/OFFICER
APR-2008
/
APRIL 2008
AID FRAMEWORK
CODE 171
DESCRIPTION PAKISTAN
FUNDING DETAILS - In order to choose correct details below, see section on Funding
Details in the guidance especially Table 1 – Funding Types and the flowchart
Hierarchy of Funding Types. Annex 3 in the guidance also provides DAC’s List of
multilateral and bilateral institutions in order to help determine which institutions can be
classed as multilateral.
FUNDING TYPE
MIS CODE
Total DFID Cost
Procurement of Services
171 540 007
(£)
£10,000,000
WHICH ORGANISATION IS THE FIRST TO RECEIVE
THE FUNDS? (EXCLUDING CROWN AGENTS) E.G.
WORLD BANK.
IF "MULTILATERAL ORGANISATION” OR
“DEVELOPMENT BANK REPLENISHMENT” FUNDING
TYPE HAS BEEN CHOSEN, WHICH TYPE OF
CONTRIBUTION IS BEING GIVEN?
BENEFITING COUNTRY – NOTE IF THE BENEFITING
COUNTRY IS UNKNOWN THEN PLEASE ENTER “NON
SPECIFIC".
COORDINATED APPROACH - IF FUNDING TYPE
“PROCUREMENT OF SERVICES” HAS BEEN
SELECTED ABOVE, IS THIS PROVIDED THROUGH
A CONSULTANCY FIRM (TO BE
DECIDED THROUGH TENDER)
Click and select from list
PAKISTAN
Yes
COORDINATED PROGRAMMES CONSISTENT WITH
NATIONAL DEVELOPMENT STRATEGIES?
SWAP (SECTOR WIDE APPROACH).
No
Joint Project - Details are required of whether or not the project is a joint project,
please only include projects where donors are channelling funds through another
donor’s management systems and accepting the lead donors reporting, accounting
and audit requirements. Please start with DFID’s Role. No Funding Contribution(£)
is required for DFID in this section as it should be the same as Total DFID Cost
under Funding Details, however the Role and Funding Contribution (£) must be
shown for all other funding organisations.
ROLE
FUNDING ORGANISATION
FUNDING
CONTRIBUTION
(£)
Click and select from list
Click and select from list
Click and select from list
Click and select from list
Click and select from list
Click and select from list
Input sector codes - Insert up to 8 codes, their descriptions and allocated % ( to
nearest 5%). Primary Code is linked to the Broad Sector and this must have the
highest percentage attached to it. Total of Input Sector codes must be 100%. Annex
4 in the guidance gives a complete list of Input Sector Codes in their Broad Sectors
whilst Annex 6 gives the correct Input Sector Codes and proportions for General
Budget Support projects. Multilateral Core Contributions should be marked with the
Input Sector Code 88888 at 100%. If Non Core Multilateral Contributions are being
given towards Capacity Building, Input Sector code 88889 should be stated at
100%.If Non Core Contributions are being made to fund inward secondees to a
multilateral organisation then Input Sector Code 88890 should be stated at 100%.
IS 1
IS Code
24030
DESCRIPTION
FORMAL SECTOR FINANCIAL INTERMEDIARIES
Percentage
70 PRIMARY
IS 2
24040
INFORMAL/SEMI-FORMAL FINANCIAL
30
INTERMEDIARIES
IS 3
IS 4
IS 5
IS 6
IS 7
IS 8
TOTAL: 100
B. ADDITIONAL PROJECT INFORMATION
NOTE: THE DETAILS IN THIS SECTION OF THE PHS WILL BE COLLECTED VIA PRISM BY
PROJECT OFFICERS INPUTTING IT THE DAY AFTER THE MIS CODE HAS BEEN CREATED.
DEPARTMENTAL STRATEGIC OBJECTIVES (DSO) - Departmental and Cross Cutting
Objectives have replaced PIMS. All projects regardless of value must have at least one
DSO marked Principal. Click to select either P=Principal, S=Significant, N=Not
targeted to indicate which ojectives are being targeted. Annex 7 of guidance shows the
breakdown of the DSO indicators.
1.GOVERNANCE, GROWTH, TRADE
2. CLIMATE CHANGE AND
P
AND BASIC SERVICES
ENVIRONMENT SUSTAINABILITY
3.CONFLICT, HUMANITARIAN AND
4. GLOBAL PARTNERSHIP FOR
PEACE
5. MORE EFFECTIVE DONORS
7. INTERNAL EFFICIENCY AND
DEVELOPMENT
S
6. HIGH QUALITY AID
S
EFFECTIVENESS ORGANISATION
CROSS CUTTING OBJECTIVES - Is project targeting Gender or HIV/AIDS? Click to select
either P=Principal, S=Significant, N=Not targeted or M=Multilateral to indicate if project
is targeting any of these Cross Cutting Objectives or not.
S
GENDER EQUALITY
HIV/AIDS
IMPACT WEIGHTINGS FOR OUTPUTS - have been introduced in order to improve project
management and performance. It is a new way of designing and scoring projects.
Outputs should be weighted according to their impact. Only Outputs shown on the
logical framework should be entered into this section of the PHS with their
Description, Impact Weightings Output % ( to nearest 5%) and Output Risk. Total
Impact Weightings % should be 100%.
Outputs
Description
Impact
Output Risk
weighting
output %
OUTPUT 1
1-IMPROVEMENT IN FINANCIAL
60
Medium
SECTOR INFRASTRUCTURE AND
GOVERNANCE AND THE DEVELOPMENT
OF NEW PRODUCTS
OUTPUT 2
2-FINANCIAL INSTITUTIONS BETTER
20
Medium
20
Medium
ABLE TO PROVIDE POOR WITH
FINANCIAL SERVICES
OUTPUT 3
3-FINANCIAL SERVICES ARE BETTER
DISTRIBUTED ACROSS THE COUNTRY
OUTPUT 4
4-
OUTPUT 5
5-
OUTPUT 6
6
OUTPUT 7
7-
Click on list to select
OUTPUT 8
8-
Click on list to select
OUTPUT 9
9-
Click on list to select
OUTPUT 10
10-
Click on list to select
TOTAL % 100
Aid Effectiveness - Information collected here is required to report to the Treasury on
the Efficiency Review, to DAC following the Paris Declaration on Donor
Harmonisation and to report on the proportion of aid that uses partner government
systems. See section 7- Aid Effectiveness in guidance for further information.
Is this a PBA?
Single programme/budget
framework?
Formalised process for
harmonisation of donor
procedures?
Part Gov Systems?
Uses national budget
execution procedures?
Audited through partner
Gov procurement
systems?
Aid to Government
Sector? Please indicate if
aid funds are due to go to
the government of a
country AND they have
been told this.
This question refers to whether the project is a
Programme Based Approach (PBA). In order for a
project to be classed as a PBA all four questions under
this section must be answered Yes.
Yes
Leadership by host
Yes
country/organisation
?
Yes
Efforts to increase
No
use of local
systems?
This section collects data on the proportion of aid that
uses partner government systems. In order to show
project is defined as having met the Paris Declaration
target on use of national PMF systems the first 3
questions have to be answered Yes and then the % has
to be entered.
No
Reported through
No
partner Gov financial
reporting
procedures?
No
% of procurement
0
via partner Gov
procurement
systems?
No
Conditionality - Information is now being gathered as to whether the project has
any specific conditions attached to the commitment of aid.
ARE THERE SPECIFIC CONDITIONS
No
ATTACHED TO THE COMMITMENT OF AID?
Delegated Authority I confirm that the above details are correct, that this project is
aligned with DFID’s strategic objectives as indicated, and that this is reflected in the
Supergoal/Goal/Purpose and OVI sections of the Logical Framework as appropriate.
Name
Grade
Signed
Date (DD/MM/YYYY)
Checklist:
For projects of £1m or more you should have to hand the following project
documentation
Concept Note
Project Document
Logical Framework
Consultation Record
Environmental Screening Note
Is the Project Title and Purpose meaningful? Remember details entered on
the PHS are published on DFID’s external website.
Has the name of the Project Officer been entered on the PHS?
Has the correct Funding Type been chosen? (See Section 3 in guidance).
Has the correct Formal Exchange been used? (See Section B10 of Blue Book
“Aid Spending: which formal exchange to use with Development Partners”).
Do the Input Sector Codes and Impact Weightings for Outputs each total
100%?
Is there an entry in each of the DSO and Cross Cutting Objectives fields to
show which objectives are being targeted?
Have all the questions under Aid Effectiveness and Conditionality been
answered?
Has the correct Person/Grade signed the PHS and Concept Note? (See notes
on Delegated Authority in Blue Book).
Has all the correct project documentation been stored correctly onto Quest?
Stage A - stage before the MIS code is created. At this point all project
documentation should be saved into a holding folder in Quest under the level
“2 Pre Project and Pre-Programme”. Documents at this stage should not be
declared as Records.
Stage B - once the MIS Code has been created and documentation approved,
a folder will be automatically created overnight in the “Live Projects and
Programmes” area in Quest, the project documentation stored earlier in Stage
A must be moved into this area and then declared as Records. This can be
done at the same time as the Additional Project Information (API) is being
entered via PRISM. However, please remember that the PHS should only be
declared as a Record once GST has approved it.
Project documentation must continue to be emailed to GST by sending a link
to the documentation within the Quest system.
PROJECT HEADER SHEET 2 – FINANCIAL AID FOR: TA, CREDIT
ENHANCEMENT FACILITY, CREDIT GUARANTEE FUND AND INSTITUTIONAL
STRENGTHENING FUND
A. PROJECT INFORMATION
Project primary details – Please refrain from using abbreviations and acronyms
unless they are truly worldwide known e.g. UN.
NEW/AMENDED PHS Amended PHS
AMENDED PHS – PLEASE ENTER
VERSION NUMBER 2
PROJECT STAGE
Implementation - Project Fully Approved
IF AT PLANNING STAGE, ENTER ESTIMATED PROJECT TOTAL COSTS £
PLANNED PROJECT DATES (MMYYYY) - START JULY 2013
PROJECT TITLE (50 CHARACTERS INCLUDING SPACES)
END
July 2013
PAKISTAN FINANCIAL
INCLUSION PROGRAMME
PROJECT PURPOSE
IMPROVED ACCESS TO FINANCIAL SERVICES FOR
POOR AND MARGINALIZED GROUPS AND FOR MICRO, SMALL ENTERPRISES
IN PAKISTAN.
INITIAL PROJECT RISK
Medium
LEAD ADVISER
HAROON SHARIF
PROJECT OFFICER
ZOI ANDREW
INITIAL ESN DATE MMYYYY/OFFICER
APR-2008
/
APRIL 2008
AID FRAMEWORK
CODE 171
DESCRIPTION PAKISTAN
FUNDING DETAILS - In order to choose correct details below, see section on Funding
Details in the guidance especially Table 1 – Funding Types and the flowchart
Hierarchy of Funding Types. Annex 3 in the guidance also provides DAC’s List of
multilateral and bilateral institutions in order to help determine which institutions can be
classed as multilateral.
FUNDING TYPE
MIS CODE
Total DFID Cost
Non Budget Support Financial Aid
171 031 001
(£)
£40,000,000
WHICH ORGANISATION IS THE FIRST TO RECEIVE
STATE BANK OF PAKISTAN
THE FUNDS? (EXCLUDING CROWN AGENTS) E.G.
WORLD BANK.
IF "MULTILATERAL ORGANISATION” OR
Click and select from list
“DEVELOPMENT BANK REPLENISHMENT” FUNDING
TYPE HAS BEEN CHOSEN, WHICH TYPE OF
CONTRIBUTION IS BEING GIVEN?
BENEFITING COUNTRY – NOTE IF THE BENEFITING
PAKISTAN
COUNTRY IS UNKNOWN THEN PLEASE ENTER “NON
SPECIFIC".
COORDINATED APPROACH - IF FUNDING TYPE
Click on list to select
“PROCUREMENT OF SERVICES” HAS BEEN
SELECTED ABOVE, IS THIS PROVIDED THROUGH
COORDINATED PROGRAMMES CONSISTENT WITH
NATIONAL DEVELOPMENT STRATEGIES?
SWAP (SECTOR WIDE APPROACH).
No
Joint Project - Details are required of whether or not the project is a joint project,
please only include projects where donors are channelling funds through another
donor’s management systems and accepting the lead donors reporting, accounting
and audit requirements. Please start with DFID’s Role. No Funding Contribution(£)
is required for DFID in this section as it should be the same as Total DFID Cost
under Funding Details, however the Role and Funding Contribution (£) must be
shown for all other funding organisations.
ROLE
FUNDING ORGANISATION
FUNDING
CONTRIBUTION
Click and select from list
Click and select from list
Click and select from list
Click and select from list
Click and select from list
Click and select from list
(£)
N/A
DFID
Input sector codes - Insert up to 8 codes, their descriptions and allocated % ( to
nearest 5%). Primary Code is linked to the Broad Sector and this must have the
highest percentage attached to it. Total of Input Sector codes must be 100%. Annex
4 in the guidance gives a complete list of Input Sector Codes in their Broad Sectors
whilst Annex 6 gives the correct Input Sector Codes and proportions for General
Budget Support projects. Multilateral Core Contributions should be marked with the
Input Sector Code 88888 at 100%. If Non Core Multilateral Contributions are being
given towards Capacity Building, Input Sector code 88889 should be stated at
100%.If Non Core Contributions are being made to fund inward secondees to a
multilateral organisation then Input Sector Code 88890 should be stated at 100%.
IS Code
DESCRIPTION
Percentage
IS 1
24010
FINANCIAL POLICY AND ADMINISTRATIVE
40%
MANAGEMENT
IS 2
IS 3
24030
24040
IS 4
24081
FORMAL SECTOR FINANCIAL INTERMEDIARIES
INFORMAL/SEMI-FORMAL FINANCIAL
45%
10%
INTERMEDIARIES
Education/training in banking and financial
services
5%
IS 5
IS 6
IS 7
IS 8
TOTAL: 100%
B. ADDITIONAL PROJECT INFORMATION
NOTE: THE DETAILS IN THIS SECTION OF THE PHS WILL BE COLLECTED VIA PRISM BY
PROJECT OFFICERS INPUTTING IT THE DAY AFTER THE MIS CODE HAS BEEN CREATED.
DEPARTMENTAL STRATEGIC OBJECTIVES (DSO) - Departmental and Cross Cutting
Objectives have replaced PIMS. All projects regardless of value must have at least one
DSO marked Principal. Click to select either P=Principal, S=Significant, N=Not
targeted to indicate which ojectives are being targeted. Annex 7 of guidance shows the
breakdown of the DSO indicators.
1.GOVERNANCE, GROWTH, TRADE
2. CLIMATE CHANGE AND
P
AND BASIC SERVICES
ENVIRONMENT SUSTAINABILITY
3.CONFLICT, HUMANITARIAN AND
4. GLOBAL PARTNERSHIP FOR
PEACE
DEVELOPMENT
5. MORE EFFECTIVE DONORS
7. INTERNAL EFFICIENCY AND
S
6. HIGH QUALITY AID
S
EFFECTIVENESS ORGANISATION
CROSS CUTTING OBJECTIVES - Is project targeting Gender or HIV/AIDS? Click to select
either P=Principal, S=Significant, N=Not targeted or M=Multilateral to indicate if project
is targeting any of these Cross Cutting Objectives or not.
S
GENDER EQUALITY
HIV/AIDS
IMPACT WEIGHTINGS FOR OUTPUTS - have been introduced in order to improve project
management and performance. It is a new way of designing and scoring projects.
Outputs should be weighted according to their impact. Only Outputs shown on the
logical framework should be entered into this section of the PHS with their
Description, Impact Weightings Output % ( to nearest 5%) and Output Risk. Total
Impact Weightings % should be 100%.
Outputs
Description
Impact
Output Risk
weighting
output %
OUTPUT 1
1-IMPROVEMENT IN THE PLANNING AND
30%
Medium
IMPLEMENTATION OF FINANCIAL INCLUSION
POLICIES,
OUTPUT 2
2-FINANCIAL INSTITUTIONS BETTER ABLE TO
30%
Medium
5%
Medium
20%
Medium
5%
LOW
5%
LOW
5%
LOW
PROVIDE POOR WITH FINANCIAL SERVICES
OUTPUT 3
3-FINANCIAL SERVICES ARE BETTER
DISTRIBUTED ACROSS THE COUNTRY
OUTPUT 4
4-IMPROVEMENT IN FINANCIAL SECTOR
INFRASTRUCTURE AND GOVERNANCE AND
THE DEVELOPMENT OF NEW PRODUCTS
OUTPUT 5
5- FINANCIAL LITERACY INCREASES,
ESPECIALLY AMONG POOR AND
MARGINALISED GROUPS
OUTPUT 6
6- UNDERSTANDING OF FINANCIAL ACCESS
ISSUES INCREASES AMONG POLICYMAKERS
AND OPINION FORMERS
OUTPUT 7
7- IMPROVED COMMUNICATIONS BETWEEN
KEY STAKEHOLDERS, INCLUDING DONORS
OUTPUT 8
8-
Click on list to select
OUTPUT 9
9-
Click on list to select
OUTPUT 10
10-
Click on list to select
TOTAL % 100
Aid Effectiveness - Information collected here is required to report to the Treasury on
the Efficiency Review, to DAC following the Paris Declaration on Donor
Harmonisation and to report on the proportion of aid that uses partner government
systems. See section 7- Aid Effectiveness in guidance for further information.
Is this a PBA?
Single programme/budget
framework?
Formalised process for
harmonisation of donor
procedures?
Part Gov Systems?
Uses national budget
execution procedures?
Audited through partner
Gov procurement
systems?
Aid to Government
Sector? Please indicate if
aid funds are due to go to
the government of a
country AND they have
been told this.
This question refers to whether the project is a
Programme Based Approach (PBA). In order for a
project to be classed as a PBA all four questions under
this section must be answered Yes.
Yes
Leadership by host
Yes
country/organisation
?
Yes
Efforts to increase
YES
use of local
systems?
This section collects data on the proportion of aid that
uses partner government systems. In order to show
project is defined as having met the Paris Declaration
target on use of national PMF systems the first 3
questions have to be answered Yes and then the % has
to be entered.
No
Reported through
No
partner Gov financial
reporting
procedures?
No
% of procurement
0
via partner Gov
procurement
systems?
No
Conditionality - Information is now being gathered as to whether the project has
any specific conditions attached to the commitment of aid.
Are there specific conditions attached to
No
the commitment of aid?
Delegated Authority I confirm that the above details are correct, that this project is
aligned with DFID’s strategic objectives as indicated, and that this is reflected in the
Supergoal/Goal/Purpose and OVI sections of the Logical Framework as appropriate.
Name
Grade
Signed
Date (DD/MM/YYYY)
Checklist:
For projects of £1m or more you should have to hand the following project
documentation
Concept Note
Project Document
Logical Framework
Consultation Record
Environmental Screening Note
Is the Project Title and Purpose meaningful? Remember details entered on
the PHS are published on DFID’s external website.
Has the name of the Project Officer been entered on the PHS?
Has the correct Funding Type been chosen? (See Section 3 in guidance).
Has the correct Formal Exchange been used? (See Section B10 of Blue Book
“Aid Spending: which formal exchange to use with Development Partners”).
Do the Input Sector Codes and Impact Weightings for Outputs each total
100%?
Is there an entry in each of the DSO and Cross Cutting Objectives fields to
show which objectives are being targeted?
Have all the questions under Aid Effectiveness and Conditionality been
answered?
Has the correct Person/Grade signed the PHS and Concept Note? (See notes
on Delegated Authority in Blue Book).
Has all the correct project documentation been stored correctly onto Quest?
Stage A - stage before the MIS code is created. At this point all project
documentation should be saved into a holding folder in Quest under the level
“2 Pre Project and Pre-Programme”. Documents at this stage should not be
declared as Records.
Stage B - once the MIS Code has been created and documentation approved,
a folder will be automatically created overnight in the “Live Projects and
Programmes” area in Quest, the project documentation stored earlier in Stage
A must be moved into this area and then declared as Records. This can be
done at the same time as the Additional Project Information (API) is being
entered via PRISM. However, please remember that the PHS should only be
declared as a Record once GST has approved it.
Project documentation must continue to be emailed to GST by sending a link
to the documentation within the Quest system.
Annex VII: Environmental Screening Note (ESN)
The New ESN
The format of the ESN has changed (May 2007). Although the procedure is the
same, the new ESN helps project officers prepare quality ESNs by providing links to
good practice examples prepared for similar interventions and relevant guidance
documents and checklists. It also provides prompts to help you follow the
procedures.
What does the Blue Book say?
“It is the responsibility of the Project Officer to complete the Environmental Screening
Note (ESN), in consultation with the Environment Adviser and to ensure that any
actions identified during screening are taken forward. Specific actions must be
reflected in the project document and the logical framework. Both the Project Officer
and the Environment Adviser must approve the ESN.
Approval e-mails must be saved in Quest as records and, where appropriate, linked to
the approved documents.”
What guidance is available?
In addition to the links provided in the new ESN, the Blue Book Best Practice Guide
gives more information on Integrating Environmental Opportunities and Risks into
Development Processes.
The Environment Guide also provides specific information on the following:
Introduction to environmental screening
Why to screen for environmental issues
Who does environmental screening and when
How to do environmental screening
Further environmental investigation
Frequently asked questions, glossary and acronyms
If you have any concerns or questions regarding completion of the ESN you can
either talk to your environment adviser, contact the Head of Environment Profession
or you can use the services of the environment resource centre (DEW-point).
Other sources of guidance include the EuropeAid Environmental Integration
Handbook, the World Bank Environmental Assessment Sourcebook, the OECD/DAC
SEA Guidance and the CIDA SEA Handbook.
Section A – Basic Information
Project
Title:
Financial Inclusion Programme Pakistan
Help – F1
Project
Cost:
£50 million DFID funds
Help – F1
Duration:
Help – F1
5 years
Country:
Help – F1
Pakistan
Departmen
t:
DFID-Pakistan
Help – F1
Lead Project/Desk Officer:
Help – F1
Zoi Andrew
Officer responsible for environmental
screening:
Zoi Andrew
Help – F1
Funding
type:
Grant
Co-funders:
Help – F1
Brief description of intervention: Help – F1
The aim of FIP is to provide efficient and equitable market based financial services to
the poor. The programme intends to do this through better regulation, availability of
information, provision of long term commercial financing, improving technology
infrastructure and skills development. The programme will prioritise microfinance and
Small enterprises (SE) financing in the initial years, with other areas such as rural
and housing finance to come later.
Specific components of the programme are below:
Capacity building for banks and the State Bank of Pakistan (SBP).
A Financial Innovation Challenge Fund for innovative technolgies and commercially
sustainable finacial services that reach the poor and currently underserved
populations.
A long term credit enhancement facility to meet the gap in funds currently available to
microfinance lenders.
Financial literacy and information sharing activites
A Guarantee Fund to meet the gap in financing available for the SE sector
An Institutional Strengthening Fund to support microfinance institutions (including the
apex institution) implement reform plans for becoming more operationally sustainable
and less dependent on government grants.
Low income housing, rural and agricultural finance - strategies and implementation
plans, including capacity building for relevant bodies.
And
Environmental issues: (Include environmental risks, benefits and opportunities, as
appropriate. Also outline other environmental information such as compliance with
relevant policy and legislation, capacity for environmental management in country,
comments on relevant environmental trends in the country or region and information
on related environmental projects implemented by government or other donors.)
Potential risks and benefits to the environment will depend on how individuals,
businesses and institutions ultimately use their grants and loans. FIP is a complex
and multifaceted programme. The potential effect on the environment is likely to be in
the form of the sum of several different and disperse activities rather than through a
single or few large interventions.
Some of the risks could include:
- Increased pollution and contribution to global warming from increased energy use in
small businesses.
- soil erosion / ecosystem damage from increased agricultural / rural finance
- increases in environmental pollution from loans to SEs engaged in manufacturing or
primary production
- Increases in environmental damage or fuel / utility costs for house owners if housing
loans are advanced against poorly designed structures. Housing must conform to
minimum specifications of the approved building codes of Pakistan.
Potential benefits and opportunities include:
- Improvements in environmental policies of commercial, state banks and the NRSP
and other microfinance institutions under the FIP. This could include aspects of
environmental accounting, due diligence and risk analysis.
-The potential for combining cleaner and more efficient uses of energy with the
innovative technologies and services to be funded through the Financial Innovation
Fund.
- The potential use of carbon financing for cleaner technologies
- The potential for systematically coordinating activities funded under FIP with
appropriate environmental policies and bodies in Pakistan.
-Reduced vulnerability to shocks (environmental and economic).
Environmental actions: (List the actions required to ensure that the risks are
managed and the benefits and opportunities maximised.)
Consultation with appropriate Environmental authorities and /or review of relevant
environmental laws and policies
Environmental screening and policy development should be included in the approval
processes of the various funding mechanisms under FIP and specific appropriate
actions integrated into sub-project development and design.
After the first year of the programme (Phase 1) specific environmental actions should
be integrated into the log frame as appropriate.
Have these actions been recorded in the: Logframe? Not yet – will be after phase 1
Project Memorandum? Yes
Responsibilities: (Identify who is responsible for implementing the actions.)
The Fund Managers of the various funding mechanisms (Financial Innovation Fund,
Institutional Strengthening Fund, Credit Enhancement and Credit Guarantee
schemes) will be responsible for implementing the environmental screening
procedures.
The DFID Programme Officer and Environmental Adviser will be responsible for
ensuring appropriate clauses in the TORs of consultants who develop the various
funding mechanisms. Alternatively, they will be responsible for separately recruiting
a single environmental specialist to work with the various teams developing each
mechanism (subject to funding approval).
Have they been made aware of and confirmed their agreement to their
responsibilities? Not applicable for the Fund managers as yet because tendering
has not started for these jobs. The Programme Officer and Environmental Adviser
are aware of and accept their responsibilities
Monitoring and evaluation:
Environmental issues and action points will be reviewed as part of the programme
annual reviews.
Section C – Sign off
Environment adviser: Andrew McCoubrey
Date : 14.04.08
Lead project officer: Zoi Andrew
Date: 14.04.08
Annex VIII: Social Appraisal
1.
Pakistan, with its population of about 160 million, ranks 136 th (out of
177) on the latest Human Development Index.10 The positive macro
economic developments in recent years (e.g. GDP growth averaging 7% per
annum over the last five years, decline in unemployment rate from 8.3% in
2002 to 6.5% in 2005; increase in remittances; increase in foreign exchange
reserves)11 have unfortunately not translated into a significant reduction in
poverty.
The GoP’s concerted efforts through the launch of Poverty
Reduction Strategy Paper 1 (PRSP) with its emphasis on economic growth,
social sector services, and social protection measures have still not resulted
in reducing the regional, social and income-based inequalities.12 Furthermore,
only about 50% of the adult population is literate, with overall male and female
literacy rates standing at 63% and 36% of the total population.
2.
Within the continuing inequalities, women stand out as being the most
marginalized as they are among the poorest and the most vulnerable groups
in Pakistan.13 Women’s exclusion is further exacerbated by the cultural
constraints on their mobility in more conservative areas, limiting their chances
to participate in the economic, political and social spheres. In addition to fixed
and unequal gender relations and highly skewed wealth distribution,
Pakistan’s path to pro-poor development is further hindered by the structure of
land ownership, low rate of capital formation and enduring ethnic and religious
tensions.14
3.
Against this backdrop, FIP is an outcome of the recognition by the GoP
that sustainable growth and poverty reduction cannot be achieved, if the
neglected segments of the population, i.e. the poor and the marginalised, are
not included in the process. FIP is fully aligned with the PRSP I, which is
supported by DFID’s Country Assistance Plan (CAP). It directly contributes to
the MDG 1: Reduce Income Poverty and will indirectly contribute to the MDG
3: Promote Gender Equality and the MDG 5: Improve Maternal Health 15.
4.
FIP will mostly benefit the poor living in the segments just above and
below the poverty line, which are considered to be the most appropriate
microfinance market. The microfinance strategy paper of the GoP defines
them as Transitory Vulnerable and Transitory Poor, which make up about
29.5 million adults. Within this target framework, poor people show various
characteristics, as they are involved in various economic activities. The
diverse range of sub-groups include, but are not limited to, agricultural
labour/small farmers, domestic workers, construction labour - skilled and
10
Human Development Report, (2007-8) UNDP. Available from: http://hdr.undp.org/en/statistics
CLEAR Report Pakistan, (2007) CGAP.
12 PRSP II is ready to be launched in early 2008.
13 Pakistan Poverty Assessment (2003) GoP, undertaken with DFID support.
14 Pakistan Drivers of Change, (2004) DFID.
15 There is some evidence to support that women’s participation in financial activities that generate
income does lead to their improved decision making role at the hh level and improved nutrition and
health.
11
unskilled, small vendors, small shop keepers, home based cottage industry
workers.
5.
FIP does not directly address the needs of the approximately 7.5
million chronic poor and extremely poor16, requiring specific interventions
which are being reviewed under the broader Social Protection component of
the PRSP through planned improvement and expansion of the provision of
social transfers from 2 million to 6 million poor over five years as part of the
implementation of the National Social Protection Strategy (approved in June
2006). DFID is currently designing other programmes to address the needs of
the chronic and extremely poor. Such programmes will enable the poorest of
the poor to eventually link up with the wider microfinance services. Similarly,
FIP does not discourage but supports the efforts of various microfinance
instituions to explore options of improving the lives of the poorest of the poor
in an effective manner.
6.
FIP will provide the opportunity for the SBP to improve upon the
market distortions which have so far excluded different interest groups and
different categories of poor from the broad range of financial services. There
is also scope to further test and fine tune some of the innovative product
development work that is being carried out by different Microfinance players,
with particular focus on reducing the vulnerability of the poor, a large
proportion of whom are women. Many of the current product innovation pilots
are not being widely shared and expanded across the sector. Some examples
are micro insurance work by the RSPs with Adamjee Insurance, micro
leasing17 and public private partnerships18. FIP also provides an opportunity to
further focus, in a cost effective manner, on some of the areas mentioned in
the Microfinance Ordinance which are not yet fully explored from the
perspective of the poor. For example, the Ordinance calls for the provision of
financial/business advisory services and facilities to poor clients to hedge
various risks relating to microfinance activities.
7.
FIP can further assist in unpacking the urban/rural dichotomy. This can
be done by identifying ‘growth centres’, not only in the urban but also in the
rural areas. FIP interventions can thus help to break the myth that all rural
areas present low demand or all urban areas imply high demand for financial
services. Options will be explored to increase outreach to poor women and
other marginalized groups, with focused interventions. Such marginalised
groups would include, for example, more conservative religious communities
which do not want to avail financial services for various reasons; groups with
certain ethnic or religious identity, which do not even have the benefit of
participating in existing land tenure arrangements (and hence lacking any
16
Planning Commission 2001 and CPRID Household Income and Expenditure Survey 2000-001.
Projects on micro leasing supported by, for example, UNDP’s GSP, and SDC
18 Examples are Pakistan Post with FMFB, RSPs’ and other NGOs’ role in linking up village/urban
communities with financial services, UNDP’s partnership with Nestle/Halla under ‘Community
Empowerment through Livestock and Credit’ initiative of the Gender Support Programme, which is
also funded by DFID together with other donors.
17
financial collateral)19, financially illiterate; the disabled and those living in far
off areas. The Financial Inclusion Programme, through innovative savings
products, small enterprises products, and financial literacy is designed to help
the poor women and men in acquiring financial services that are convenient,
flexible and affordable and that go beyond the provision of loans. 20 FIP will
support microfinance services that could help the poor to participate in income
generating activities and explore different investment opportunities, thus
increasing their livelihood options.
8.
The concerns and hopes of the various supply side stakeholders have
been dealt with in detail in other sections of the Project Memorandum. On the
demand side, various studies21 have highlighted the concerns of the target
beneficiaries of FIP, i.e. those just above and below the poverty line. These
concerns have also been incorporated in the project. A nation-wide Access to
Finance Survey (final report expected in July 2008) is also currently in
progress, which will inform the on-going design and implementation of FIP
from the point of view of the beneficiaries. It will provide important insights into
individual and household behaviour including the psychological barriers to
accessing financial services. The overall impact of microfinance on the poor,
particularly in relation to empowerment is still an area to be addressed.22
However, based on the evidence presented in these studies as well as
discussions with stakeholders, it can be safely stated that FIP will bring many
potential benefits to the poor, particularly women. For example:
a)
Microfinance services will link up the poor with more formal
financial channels, thus reducing their reliance on the substantially
more expensive informal channels.
b)
FIP offers the poor the chance to reduce their vulnerability to
shocks through savings, insurance schemes and access to credit. It
also raises poor people’s awareness about financial management.
c)
Access to microfinance services will also bring relative
improvements in nutrition in-take and access to health at the household
level. How much of that is skewed towards household male members
is subject to further research.
d)
As evidence from various studies suggests, access to
microfinance through women focused interventions, will lead to a
relative degree of autonomy for poor women in the household decision
making, though overall control over resources and decision making in
the public sphere is still a desired goal. Women’s access to financial
19
Access to Land and its Linkages to Poverty Reduction in Pakistan, 2007, DFID.
CLEAR Pakistan Report, 2007, CGAP.
21 -Poverty and Social Impact Assessment: Pakistan Microfinance Policy, May 2006, OPM;
-A. C. Nielson, 2007, Pakistan Access to Finance: Focus Group Report, PMN;
- Hussein, M & Hussain, S., 2003, Impact of Microfinance on Poverty and Gender Equity,
PMN;
-Kashf Impact Assessment, 2005, Kashf Foundation;
-Asim, Salman, 2007, Challenges in the Microfinance Sector of Pakistan.
22 Poverty and Social Impact Assessment: Pakistan Microfinance Policy, May 2006, OPM.
20
services is more likely to have a positive effect on their children’s
education, household small scale expenses and their own savings.
There is also anecdotal evidence that women’s access to finance leads
to a decrease in domestic violence.
e)
Access to microfinance will help the poor clients to eventually
increase their durable assets base. Such assets are often sold to cope
with emergency shocks. Most poor women, in particular, lack land
based collateral, and hence can use microfinance initiatives to build
moveable collateral base.
d)
Through initiatives such as the Credit Information Bureaus;
further capacity building of the credit institutions, FIP will safeguard the
interests of the poor clients. For example, poor consumers will be
protected from unwarranted credit intake; checks and balances will be
developed to monitor the performance of the Microfinance banks and
institutions on the social and gender aspects. Furthermore, financial
literacy will help the poor clients, particularly women, become more
aware and informed to make financial decisions.
9.
In order to achieve massive outreach and maximum impact 23 under
FIP, it is considered essential to integrate microfinance into the formal
financial system over time. There are, however certain issues which need to
be addressed under various programme components, in order to ensure that
the above mentioned benefits do reach the target group:
i)
A shift towards market-based financial services will mean that in
the short term at least, poor women and men, particularly in the
(economically) low performing areas will be neglected. For example,
such a shift is most likely to affect the poor male and female community
members in NRSP’s area of operation, after the restructuring of its
microfinance operations into a bank.
MFBs require more
formalization/documentation and follow stricter selection criteria. Hence
there is a danger that a large proportion of the illiterate population, in
particular women, will be left behind, if proper support mechanisms are
not established to include them. Lessons can be learnt from the
formation of the First Micro Finance Bank, which in reality did not
capitalize upon the savings of the village and women organizations
fostered by the AKRSP24. Exploring mechanisms to link village level
savings and the new microfinance banks is a critical challenge to retain
the confidence and trust of the poor clients.
ii)
A patriarchal mind set within the banking sector prevents
innovative thinking to attract more female clients. Women’s choices
about activity and their ability to increase incomes are constrained by:
-gender inequalities in accessing other resources for investment
-responsibility for household subsistence expenditure
23
24
CLEAR Pakistan Report, (2007/,CGAP.
Valleys in Transition, 2006, AKRSP.
-lack of time due to domestic work
-low levels of mobility and literacy
-domestic violence
-sexual harassment25
Most of these factors are related to women’s lack of financial control and low
self-esteem, which translate into low confidence. Unless these multiple factors
are taken into consideration under FIP in developing women friendly products,
poor women will continue to be excluded from mainstream microfinance
programmes. New financial products need to be designed which also
empower women.
iii)
Illiteracy continues to be a major barrier for poor women and
men, especially in the remote areas. Lack of education and
understanding of contractual commitments are still major hurdles to get
support from the small enterprises sector. Most banks have made only
short term efforts to address lack of financial literacy. Identifying actors
who are best placed to do this job in a cost effective manner is a major
challenge for FIP.
iv)
‘Relationship Managers’ are disappearing in large banks,
making them more distant and ‘faceless’26. It is therefore a modern day
paradox which could be further re-enforced by branchless banking.
Poor people continue to require various forms of support due to a lack
of education, information and advisory services. They are often the
ones who also avoid banks due to the high-handed attitude of bank
staff.27 Hence, one of the unintended consequences of FIP could be
that branchless banking further alienates the poor people, particularly
those who are already marginalised because of their gender,
ethnic/religious status, disabilities or geographical location.
v)
Gender-disaggregated baseline data on economic roles in
different regions is very sketchy. Data is also missing to assess how
many male and female borrowers, for example, also access other
financial services. Another issue to be looked at is why women
continue to earn low incomes and generally borrow smaller amounts.
Loans based on quick repayments mean that women will invest in low
return economic activity with little impact on poverty reduction28. Unless
microfinance providers invest in building this baseline in their
respective areas, sound development of new financial products will be
difficult. Improved monitoring and evaluation systems, supported by
key analytical studies and surveys under FIP will aim to address this
gap.
vi)Trained female and male work force at the middle management and
field level is still very thin. This particularly impacts women’s financial
25
Website: www.genfinance.info/
Interview with Maliha Hussain, Consultant Microfinance.
27 A. C. Nielson, 2007, Pakistan Access to Finance: Focus Group Report, (2007), PMN.
28 Hussein, M & Hussain, S. 2003 Impact of Microfinance on Poverty and Gender Equity, PMN.
26
inclusion, due to cultural barriers. For example, Kashf’s recent impact
assessment (2005) shows that most of their female clients save, but do
not deposit their savings with microfinance institutions or banks.
Women’s mobility constraints, lack of door step services, nonavailability of nearby branches, need for flexibility of access to savings
are some of the factors behind this trend.
10.
Without properly addressing the above issues, the following risks
could affect the smooth implementation of FIP:

Rapid and easy expansion concentrated in a few urban centres
could exacerbate negative impacts of micro finance. For example, it
could: lead to rigid product design which does not take into account
the financial needs of the different marginalised groups as well as
women; dilute the emphasis on providing necessary support
services; and lead to lack of attention to the local economic context.
In the end, the risk to poor clients can increase as well as the risk of
default.

Focus on financial sustainability without parallel efforts in innovation
and HR support may dis-empower the poor and marginalized groups
and also increase gender inequality. It could also mean that the
banks end up focusing more on the better off.

Without the development of gender-based monitoring frameworks to
assess microfinance banks and institutions’ performance at the
organizational and operational level, financial inclusion will remain
gender biased.
11.
In order to mitigate these risks, the following interventions could play
a key role in the design and implementation of FIP:
11.1 Capacity building of relevant departments within SBP in
gender based performance analysis and development of key
indicators to assess how financially inclusive MFBs are. For
example, Annual Reports of microfinance banks should include gender
disaggregated indicators for borrowers as well as users of other
financial services. This would help to trace the trend of how innovative
individual microfinance banks and institutions become with their
financial services and what the key issues are.
11.2 It has been recommended under FIP that SBP acquires the
services of a long term gender expert. Such a gender expert29 will
assist in carrying out bi-annual gender audits of selective microfinance
banks; assist SBP in providing feedback, based on gender audits, to
the microfinance banks and institutions. The expert will work with SBP
in building the capacity of key staff in relevant departments to ensure
29
Ideally, it should be a person with strong expertise in gender, social development and financial
issues.
that gender-based financial monitoring is institutionalized. Once this is
achieved, gender analysis can be institutionalized at the level of
microfinance banks and institutions.
11.3 SBP to encourage MFBs to invest in staff at the middle
management and field level. A more proactive approach should be
encouraged in hiring female staff at the field level. Such hiring should
be supported by relevant training and staff incentives by the banks,
encouraging a competitive environment. Incentives could be linked to:
increasing the number of female depositors, improving client
information & awareness, staff developing a friendly attitude towards
clients, and assisting in the development of innovative financial
products with feed back from the field and clients.
11.4 Links can be developed with local colleges and universities to
hire new graduates. Gender friendly work options could focus on job
sharing, flexi hours, close to home posting or transport support. Some
of these incentives could be supported through FIP on a pilot basis, to
be later adopted by MFBs on the basis of best practices.
11.5 Partnerships between MFBs and other NGOs/private sector
actors to promote business development services and nonfinancial services. Areas of focus could include:






group based services (insurance30, gender friendly saving
schemes) to reduce costs;
strengthening outreach through a communication strategy
and social mobilisation expertise and targeted strategies for
remote areas;
informal micro leasing channels;
gender training for bank staff with emphasis on quick analysis
and differentiation capability of the financial needs and issues
of different clients;
advisory services in key economic areas according to poor
people’s needs; and
creation of a consumer protection body.
12.
Another key area to explore under partnerships is linkages for financial
literacy training. FIP provides ways to explore links with other DFID on-going
programmes. For example, pilot testing the use of LHWs in a few areas.
LHWs however also show various capacities and competencies as even the
best performers could hardly cover 68% of their target population. 31 Other
pilots could be tested by focusing on teachers or community activists.
30
Key lessons can be learnt from a recent review of RSPN-Adamjee Insurance Scheme. See,
Knoll, P. Qamar, K.K. et. al., 2007, RSPN.
31 Lady Health Workers Programme, (2002), OPM/DFID.
Annex IX: Risk Analysis
1.
The Logical Framework in Annex-V sets out the assumptions on which
the achievement of outputs, purpose and goal are based. In the analysis
below, following normal international practice the assumptions are set out in
negative form, and ranked according to (a) the risk of the negative condition
applying and (b) whether the impact of the negative condition on the
programme will be low, medium or high. The measures that are to be taken
(or have been taken) to mitigate each risk are also summarised. The
distribution of risks is shown in the framework in the diagram below.
Risk analysis framework
Risk
LOW
MEDIUM
HIGH
14
8
9, 12
Impact
LOW
MEDIUM
1, 3, 15, 16
4
HIGH
2, 5, 7, 10
6, 11, 13
The numbers refer to the Risk Assessment below
Risks
2.
Institutional capacity among financial service providers does not
increase (low risk, medium impact). Banks and microfinance institutions
have been successfully building their institutional capacity for several years,
and there appears to be a relatively low risk that this process will not continue.
If the capacity building process declines, the impact will be medium, because
there is already considerable capacity among banks and microfinance
institutions, though not sufficient for the achievement of all the objectives of
the FIP. The risk is being mitigated through capacity building elements in
several sub-components of the programme, with a major focus on HR
development and institutional strengthening in Component 3, as well a
through other donor programmes supporting the building of capacity among
financial institutions in Pakistan.
3.
The commitment of banks and other financial institutions to
provide accessible financial services does not continue to grow (low
risk, high impact). This is considered to be low risk as the interest of banks
and insurance companies in ‘downscaling’ their services is accelerating,
stimulated by the success of certain microfinance banks and microfinance
institutions. If that acceleration does not continue, however, the impact will be
high as increased financial inclusion requires participation across the whole
range of financial service providers, from commercial banks to NGOs and
informal service providers. This risk will be mitigated (a) through elements in
the FIP designed to build the capacity of SBP, which provides leadership,
advice and encouragement to the financial sector in this area, and (b) by subcomponents which support banks and other financial institutions in providing
access (such as the facilities in Component 2).

Adequate financial and technical support from donor partners
in the implementation of the FIP is not forthcoming (low risk,
medium impact). Donor partners have shown no sign of a
diminishing in their commitment to and support for financial
inclusion. The impact of such a diminution would be medium –
certain credit enhancement and similar facilities would suffer, but
the Government of Pakistan would still be able to implement a
significant financial inclusion programme with the aid of the
proposed FIP and the use of its own resources. This risk is being
mitigated through the communications and coordination subcomponents of Component 4, including sub-component 4.6, donor
co-ordination.

Diminishing acceptance by stakeholders of the leadership role
and responsibilities of SBP in relation to financial inclusion
(medium risk, medium impact). The SBP is not the only institution
in Pakistan that might be charged with leadership in this area: in
other countries Central Banks are often the leaders in this area, but
so are Ministries of Finance, Ministries of Economy, Planning
Ministries etc. The SBP was formally given the role of co-ordinating
the FIP in 2007; given the possibility of changes in Government in
the coming months, there is a medium risk that this role might be
transferred elsewhere. The impact of such a transfer on the FIP
would not be low: the State Bank has established a dedicated
Development Finance Group staffed with highly qualified and
dedicated staff who have demonstrated their capacity to formulate
policies in this area. It would not be easy to build such a team in
another institution, and the difficulties of doing so would mean a
significant setback to the programme. The only possible mitigation
measure is to ensure that the FIP programme is a coherent one,
much of the responsibility for which can if necessary be transferred
efficiently to a new institution.

Commitment to financial inclusion by SBP management
diminishes (low risk, high impact). The current management of
SBP is totally committed to financial inclusion. The risk of a change
of management is relatively low, and the risk of their being replaced
by a management who are not committed to financial inclusion even
lower. But of course the impact of a loss of interest of SBP
management in financial inclusion would be high. Through the SBP
capacity building programme, this risk is mitigated by ensuring that
there are staff throughout the Bank who understand the importance
of the issue and can convey it to management.
32

Reduced cultural acceptance and popular support for the
principles underlying the FIP (medium risk, high impact). The
risk of reduced support comes from two sources: firstly, a revival of
misconceptions about the role of microfinance services and the
nature and impact of interest rates in the sector, misconceptions
which were widespread even as late as 2006.32 The second source
of potential opposition arises from a mistaken belief that
microfinance services can not be compliant with Sharia law, that
formal microfinance services are somehow un-Islamic. Such beliefs,
if they spread among key stakeholders, would have a major impact
on the programme. The risk will be mitigated through the literacy
and communications elements of Component 4.

Reduced commitment by the Government of Pakistan to
implement financial sector reforms (low risk, high impact).
There is only a low risk that the current Government will abandon its
commitment to financial sector reforms. Even if there is a change of
Government in Pakistan, there is little risk that the new government
will have a lower commitment to such reforms. This risk will be
mitigated by the coherence of the policies and strategies being
developed by SBP and other institutions, a process which will in
turn be supported by Component 1 of the FIP.

Little improvement to adult literacy rates in the rural areas
(high risk, low impact). There appears to be a high risk that adult
literacy rates will not greatly improve in the next five years,
especially in the rural areas. That will have some impact on the FIP,
but the impact will be relatively low as many institutions in Pakistan
and elsewhere have demonstrated that financial products can be
developed for illiterate people. The impact can be mitigated if
specially tailored financial literacy programmes are developed
under the financial literacy sub-component (sub-component 4.1).

Slow development of the communications infrastructure (high
risk, medium impact). There is a high risk that the
communications infrastructure will not develop quickly in Pakistan in
the next five years, though there is hope that the expansion of
mobile telecommunications will continue. For obvious reasons, this
will have a high impact on the programme, especially in the rural
areas. This risk will be mitigated by encouraging innovative ways of
reaching remote areas, especially through the proposed financial
innovation challenge fund (sub-component 2.10).

The legal and regulatory framework fails to evolve to provide
an enabling environment for the growth of new financial sector
products and services (low risk, high impact). An unsuitable
legal or regulatory environment would impact very negatively on the
success of the FIP, but the risk of this happening is low. Since
See, for example, the OPM PSIA, Attachment 1.
2000, the Government of Pakistan, Parliament and the SBP have
shown a willingness to reform and improve the legal and regulatory
environment when it proves an obstacle to financial sector
development. The risk will be mitigated though the policy and
capacity building sub-components of Component 1

Growth in the financial sector slows and/or there are major
crises (medium risk, high impact). Given the current uncertainties
and instabilities in the global financial system, there is a medium
risk of contagion in developing countries, including Pakistan. This
would have a high impact on the FIP, at least in the short term. The
risk is mitigated, however, through the medium to longer term
impact of the programme, which will still be effective when the crisis
ends, even if this means that the outcomes of the programme may
be delayed.

Major constitutional and political disruption occurs (high risk,
medium impact). The recent constitutional and political disruptions
in Pakistan make it impossible to rate the risk of future disruption as
anything but high. Unless this leads to significant deterioration in
the security and law and order situation (risk 13 below), however,
the impact of such disruption on the FIP would be medium rather
than high. Many of the programmes included in the FIP can be
implemented at a technical level even during periods of
constitutional and political volatility – witness the fact that the FIP
design process has not been slowed down by the state of
emergency. The risk can be mitigated by ensuring a flexible
timetable for the implementation of the FIP which allows technical
changes to be made even while high level policy and strategy
decisions may need to be postponed.

Deterioration in the security and law and order situation
(medium risk, high impact). There appears to be a medium risk of
the law and order situation deteriorating in Pakistan to the extent
that it will impact on the implementation of the FIP – and if it does,
the impact is likely to be high. Once again, this risk can be mitigated
by designing a flexible implementation timetable to allow the
programme to pause if necessary pending the restitution of security,
law and order.

Effective business policies are not in place to support a
favourable business environment for micro enterprises and
small enterprises (medium risk, low impact). There is a medium
risk that the business environment will not improve, but experience
elsewhere in South and South-East Asia demonstrates that
financial services for small enterprises can be significantly improved
even in the absence of improvements in other elements of the
business environment (such as company registration, accounting
regulations etc). The risk will be mitigated by encouraging
imaginative solutions to small enterprises financing through such
sub-components as the credit guarantee scheme (sub-component
2.9), the financial innovation challenge fund (sub-component 2.10)
or the credit rating agency (sub-component 2.7).

Economic growth is not pro-poor (leading to increasing income
inequality in absolute and relative terms) (low risk, medium impact).
The economy of Pakistan has been growing by 7% per annum in
the past five years, in a manner which is leading to a reduction in
income inequality – the risk of this trend being reversed is low. Its
impact would be medium, because it is possible to expand financial
access, especially from a low base, even when inequality is
increasing. The risk will be mitigated through appropriate policies
and strategies developed under Component 1.

Macroeconomic instability and weak GDP growth (low risk,
medium impact). The same considerations apply as to risk 15
above.
Conclusion – the overall risk
4.
This analysis indicates that the project does carry a number of risks,
many of which are common to any major development project to Pakistan in
current circumstances. Most of the key risks relate to the fact that Pakistan
remains a relatively risky country for any large project. This is illustrated by
the fact that the most serious risks – high probability, medium impact or
medium probability, high impact – relate to the general environment in
Pakistan, namely:
(6)
Reduced cultural acceptance and popular support for the
principles underlying the FIP (medium risk, high impact).
(9)
Slow development of the communications infrastructure (high
risk, medium impact).
(11) Growth in the financial sector slows and/or there are major
crises (medium risk, high impact).
(12) Major constitutional and political disruption occurs (high risk,
medium impact).
(13) Deterioration in the security and law and order situation
(medium risk, high impact).
5.
There are, however, not considered to be any “killer risks” – high
probability, high impact risks. The growing strength of the financial system in
Pakistan, and the exceptionally high quality of the leadership and staff of the
SBP, mean that mitigation measures can be put in place for most of the risks
identified in this analysis.
Annex X: Economic Annex
1.
Financial sector development: the general benefits
1.1
It is very well established in the recent academic and practitioner
literature that a well-functioning financial sector is important both for economic
growth but also for the reduction of poverty. The sector makes its contribution
to growth in various ways including the following:

by mobilising savings and making credit available it facilitates
higher levels of investment;

by facilitating inflows of foreign capital (including FDI, portfolio
investment and bonds, and remittances) it increases the total
amount of capital available for investment;

by allocating capital efficiently between competing uses and
monitoring borrowers, it ensures that investment is used
productively;

by facilitating risk management (e.g. through the provision of
insurance, or by facilitating portfolio diversification) it provides a
buffer against losses which reduces uncertainty and so encourages
more investment; and

by making money transfers more efficient and quicker, money itself
can be used more productively.
1.2
In brief and in line with modern growth theory, a well-functioning
financial sector can contribute to growth by increasing the amount of capital
available to the economy (both physical and human capital), and by
increasing the rate of technological progress that such capital then makes
possible. To cite just one example of many, if Bolivia had been able to
increase its financial depth33 from 10% of GDP to the mean value for
developing countries in the period 1960 to 1990 (23% of GDP) then Bolivia
would have grown about 0.4% faster per annum over that period than it
actually did: by 1990 real per capita GDP would have been about 13% larger
than it was. 34 Equally, there can be static as well as dynamic gains. The
above advantages of a well-functioning financial sector apply to all productive
resources. It facilitates the more efficient – and fuller – use of all resources,
including existing capital stock.
1.3
Conversely, where the financial sector is small or weak and access to
finance is limited, for example in relation to new entrepreneurs, or SMEs, this
will constrain economic growth. One of the channels through which strong
financial sector intermediation fosters economic growth is by facilitating the
33
Measured by liquid liabilities / GDP, which represents the amount of financial intermediation in the economy.
King & Levine; 1993b, “Finance and Growth: Schumpeter Might be Right”, Quarterly Journal of
Economics, 108(3), pp.717-37
34
entry and expansion of new firms. Access to credit permits greater market
entry by talented new entrants, who would otherwise be constrained by their
lack of inherited wealth and absence of connections to the network of well-off
incumbents. To the extent that access to credit is limited to only privileged
groups, or preferred sectors, this will reduce the value of the investments
undertaken, reducing growth. So wider access to credit will increase the
productivity returns to investment.
1.4
A well-functioning financial sector can also help to reduce poverty.
First it has an indirect effect on various dimensions of poverty through its
positive impact on growth (growth is usually good for the poor). In addition it
can also have an important direct impact, to the extent that the poor have
much improved access to financial services – savings products, credit,
payment services etc. – in those countries where the financial sector is large
and efficient. These poverty-reducing effects are achieved in a number of
different ways including the following:

through the wider availability to more people of bank accounts that
enable individuals to accumulate funds in a secure place over time
– thereby avoiding the risk of seeing funds being stolen or
plundered by others;

complementary to the above, increased monetization of the
economy can increase the efficiency [reduce the costs] of normal
business transactions, by reducing the need for, or resort to, barter;

through improved access to credit which enables more poor people
to borrow funds, and thereby strengthen their productive assets by
enabling them to invest in micro-enterprises, in productivityenhancing new ‘technologies’ such as new and better tools,
equipment, or fertilizers, or in education and health, all of which can
play an important role in improving their productivity and income
over time;

by reducing the vulnerability of poorer households, by minimising
the negative impacts that income shocks can sometimes have on
long-term income prospects, if for example, income-generating
assets have to be sold at low prices out of necessity during a
household crisis;

by decreasing the proportion of low-risk, low-return assets held by
households for precautionary purposes (such as jewellery), and so
enabling them to invest in potentially higher risk but higher return
assets, (such as education or a rickshaw), which will improve their
income in the longer term. Improved access to financial services
also enables more families to invest more in their children’s
schooling.
1.5
In summary, effective financial sector development and greater
financial inclusion/access has been shown in many countries to be an
important contributor to both growth and poverty reduction. One relevant
study that examined the link between financial development and poverty
reduction finds, for example, that a 1 per cent change in financial
development raises growth in the incomes of the poor in developing countries
by almost 0.4 per cent – a significant impact. 35 Pakistan’s own PRSP
recognises the strong evidence from a range of comparable countries in Asia
and elsewhere that a deeper financial sector will in itself make a significant
contribution to growth and poverty reduction.
2.
The potential benefits to Pakistan
2.1
This literature leads very realistically to the expectation that the
improved financial sector inclusion that will be achieved by the FIP can indeed
result in significant gains in terms of both economic growth and poverty
alleviation. To support this proposition, Pakistan’s position in terms of various
aspects of its financial development are set against Asian and other relevant
comparators.
2.2
Figure 1 below shows the level of general financial depth achieved in
Pakistan relative to both lower-income and middle-income comparator
countries in Asia. This shows that although Pakistan has achieved a
reasonable level of financial depth (broad money represents more than 50%
of GDP) this compares unfavourably not only with India but also with the more
successful of the Asian economies in Korea, Malaysia and above all China.
China in particular has achieved a level of financial depth which is three times
that of Pakistan. Equally significant is the point that Pakistan “wastes” a
significant portion of the finance that the financial sector intermediates.
Specifically no less than 33% of this is tied up in relatively unproductive cash
balances in banks and in obligatory reserves. This is one of the very highest
levels seen in the Asian sample and almost 10 times the level of such assets
in South Korea. One of its undoubted indirect consequences is higher lending
costs (and charges ) in the banks that intermediate funds and so a smaller
volume of finance for on-lending for each unit of savings that is mobilised.
Jalilian, H & Kirkpatrick, C; 2001, “Financial Development and Poverty Reduction in
Developing Countries”, Working Paper No. 30, IDPM, Manchester University
35.
Figure 1: Financial depth in Pakistan and Asian comparators
180%
10%
160%
160%
140%
140%
7%
% GDP
120%
8%
100%
120%
5%
100%
4%
80%
80%
60%
15%
40%
13%
17%
18%
36%
33%
34%
9%
8%
21%
60%
40%
8%
37%
20%
20%
0%
Cash + obligatory reserves
Number shows ratio of cash to deposits
Source: OPM research
2.3
Second, Table 1 below extends the discussion to a range of financial
institutions including commercial banks that can normally be expected to
provide financial services of various types to poorer households and to
smaller businesses. The table records the number of accessible accounts per
thousand households in Pakistan and in some comparator countries.
Table 1. Accessible accounts in selected countries (per thousand
households)
Pakistan
Afghanistan
Bangladesh
Bhutan
India
Nepal
Source: OPM research
Loan
accounts
27
1
479
0
117
184
Classic
microfinance
Total
institution
number of
accounts36
accounts
5
277
1
1
518
615
0
0
261
654
149
224
2.4
These numbers reveal that only around one in four Pakistani
households hold bank and other accessible accounts compared to higher
numbers in the key comparator countries. These data measure the number of
accounts and not the percentage of the population having access to banking
Excludes savings banks, most credit unions and agricultural/rural banks (apart from explicitly rural
micro-banks).
Ch
i na
Si
ng
ap
or
e
M
al a
ys
ia
Ko
re
a,
Re
p.
Th
ail
an
d
In
di a
ta
n
In
do
ne
si a
Ph
i li p
pin
es
Pa
k is
Ne
pa
l
Vi
et
na
m
M
al d
iv e
s
Bh
ut
an
PD
R
Ba
ng
lad
es
h
Sr
iL
an
ka
La
o
Ca
m
bo
dia
0%
Deposits net of obligatory reserves
36.
180%
services. That latter number would be lower in all cases because of the
holding of multiple accounts by some households. However, a Pakistani
institution-building programme that succeeded in emulating the existing Indian
performance would need more than double the number of all accounts. The
replication of the Bangladesh performance would need an eighteen fold
increase in numbers of loan accounts.
2.5
Pakistan’s shortfalls relative to comparators can readily be identified in
rather more specific terms by reference to Table 2 and Figure 2 below.
Table 2. Micro-finance provision in Pakistan and comparator countries,
2005-6
Philippines
Afghanistan
Indonesia
Sri Lanka
India
Bangladesh
Pakistan
Population
(million)
152
140
1,080
19
218
29
83
Number of
MFPs on
MIX Market
14
49
32
8
6
9
24
Borrowers
Number of
active
borrowers
449,044 13,297,973 1,634,103 374,320 3,122,179 83,100 479,868
Mean no. of
active
borrowers
per MFP
32,075
271,387
51,066 46,790
520,363 9,233 19,995
Active
borrowers as
% of
population
0.30%
9.50%
0.15%
1.97%
1.43% 0.29%
0.58%
Loans
Total gross
loan portfolio
(US$m)
67.587
958.909
166.503 78.360 1,817.139 9.612 55.461
Mean gross
loan portfolio
per MFP
(US$m)
4.828
19.570
5.203
9.795
302.857 1.068
2.311
Average loan
per borrower
(US$)
151
72
102
209
554
116
116
In Indonesia, this represents a single lender
Source: Pakistan PSIA of Microfinance Policies in Pakistan
PAKISTAN SHARE OF SOUTH ASIAN ACCOUNTS
AT MFIs (ACCOUNTS AT STATE-OWNED MASSBANKS
EXCLUDED)
Figure 2. PakistanACCESS
share of South
Asian
accounts at MFIs (accounts at
state-owned mass-access banks excluded)
Sri Lanka
34.6%
Bangladesh
47.6%
Pakistan
0.4%
Nepal
2.4%
India
15.0%
Bhutan
0.0%
2.6
Table 2 shows that although Pakistan is the second largest country
listed after India, it has less than 450,000 active MFI borrowers which is
equivalent to only one third of one percent of its population. This is only
marginally higher than the percentage seen in Afghanistan and only one sixth
of the Sri Lanka figure.
2.7
Figure 2 shows that in spite of Pakistan’s large size, is accounts for a
wafer-thin share of all South Asian MFI accounts. Clearly there is very
considerable room to improve.
3.
The instruments of the Financial Inclusion Programme and
the likely payoffs
3.1
Sector characteristics
3.1.1 In Pakistan as in every other country in the world, the financial sector is
complicated and the diagnosis of its main problems is similarly complex.
However, that sector is typically riddled with market failures such as
informational asymmetries, capital market imperfections, large externalities
(e.g. arising from the risk of financial instability) and the potential for particular
financial institutions to wield undue market power. So the sector always needs
to be governed by a complex legal and regulatory framework with multiple
objectives. It is certainly accepted that a significant degree of public sector
intervention is necessary and inevitable in this sector.
3.1.2 Thus far in Pakistan the interventions that have been attempted have
been inadequate to the task of improving the very low level of access and
inclusion that has been summarised briefly above. New policies must
embrace new instruments and approaches.
3.2
Purpose of FIP’s interventions and the limits of benefit
quantification
3.2.1 However, the same complexity would render it misleading to attempt a
quantification of benefits in a manner that would support a conventional
cost:benefit analysis of the project. The literature referred to above is
persuasive, but it does not provide a coherent and quantifiable set of
mechanisms that connect the improvements in a country’s financial sector
(improvements of the type that FIP can help to achieve) on the one hand to
that country’s growth and poverty alleviation outcomes on the other.
3.2.2 The specific interventions envisaged for the FIP are designed to help
overcome the problems that arise from market failures; to improve the
institutional and regulatory arrangements governing the sector; and to
improve the other elements of financial sector infrastructure upon which
financial market development depends. In particular:

The Challenge Fund will help to overcome informational
asymmetries and capital market failures hampering the introduction
of, for example new and risky technologies and will facilitate a
demonstration affect associated with successful new approaches,
facilitating wider industry learning.

The HR development, technology and information dissemination
components, and the financial sector literacy strategy will help to
overcome information and coordination failures; it is also expected
that, through HR development, the FIP will generate 20,000n new
professional jobs.

The credit rating bureau and credit rating mechanism will help
overcome informational asymmetries inherent to the financial
sector.

The credit enhancement facility and credit guarantee scheme will
help to ameliorate capital market imperfections.

The remittances component will help to establish a better legal,
regulatory and infrastructural framework to facilitate remittances
from the UK to Pakistan as one very important source of funds for
domestic intermediation

The capacity building components will contribute to an improved
regulatory environment for the sector.
3.2.3 The potentially significant wider social benefits that improvements in
financial inclusion will bring, arising from an improved investment climate,
higher growth, and reduced poverty and vulnerability, provide an additional
justification for interventions designed to support and catalyse more rapid
market development and better access to financial services.
3.2.4 As noted, it is not possible to quantify with any precision the likely
impact of the FIP on Pakistan’s GDP or its poverty situation via the stronger
financial institutional structure that it can be expected to help generate. That
impact will depend to a large extent on uptake and impact of each of the
specific interventions that are introduced. However, the broader empirical
evidence referred to earlier shows that financial sector development can have
a significant impact on growth and poverty reduction. Furthermore the very
large gulf that today exists between Pakistan’s performance in the sector and
the benchmarks suggested by the comparator countries justifies the belief that
the pay-offs from these interventions in Pakistan can be very considerable.
3.2.5 In order to test this proposition and also to minimise the risks of the
project, it will be necessary (a) to verify the OVIs in the Programme Logframe
and set the percentage measurements, to provide the basis of periodic
assessment of progress with the various dimensions of inclusion; and (bi)
where possible, to set more specific benchmarks for sub-components based
on international comparative experience to help set feasible but challenging
targets for the main inclusion indicators. In this way both policy-makers and
donors will be able to observe the gradual deepening and broadening of the
sector that is the sine qua non of the project.
3.3
Tentative quantification of specific FIP elements
3.3.1 A first approach to benefit quantification would recognise that the
interest rates charged by micro-finance providers will be substantially less
than effective rates charged by informal sources. This will be so even though
the FIP, with the objective of promoting the sustainability of micro-finance
provider, aims to increase micro-finance interest to cost-recovery levels. This
could imply an increase in rates from 18 per cent to 30 per cent – rates,
however, that are substantially lower than effective rates charged by informal
sources, which can range from 80 per cent to 120 per cent.
3.3.2 The FIP has set various targets for increased access to micro-finance.
These include additional MFI clients, from one million to three million by 2010
(an increase of two million); and increased SME clients, from 168,233 to
418,617 by 2012 (an increase of 250,384).
3.4
MFI clients
3.4.1 If it is assumed that the average amount of loans per MFI borrower
remains unchanged at $151 (≈ Rps 9,438 or £76),37 this would imply a total
portfolio of new loans of $302 million (≈ Rps 18,875 million or £151 million). In
a stationary state, at a cost-recovery interest rate of 30 per cent, this would
imply annual interest payments of Rps 5,662.5 million (≈ £45.3 million). At an
assumed effective informal interest rate of around 100 per cent, the annual
interest payments would, of course, be Rps 18,875 million (≈ £151 million);
and the annual difference between the two interest streams (i.e., the savings)
would be Rps 13,212.5 million (≈ £105.7 million). If this stream is treated as
37.
See Table 2.
permanent and discounted at a rate of 9.04 per cent (equivalent to the rate on
10-year government bonds), this generates a present capital value of these
savings of Rps 146.2 billion (≈ £1.2 billion). This figure needs to be treated
with caution. It is based on the assumption that all the additional MFI clients
had previously been borrowing from informal sources. However, we do not
have data on the breakdown of projected new clients as between those who
transfer from informal to MFI sources of finance and those who are “first-time”
borrowers. If it is assumed that half of the additional MFI borrowers are firsttime borrowers, while the other half had been borrowing from informal
sources, the present discounted figure would fall to Rps 104.4 billion (≈
£835.2 million). Nonetheless, the figure remains substantial.38
3.4.2 On the other hand, as micro-finance providers started to charge costrecovery interest rates, the one million existing MFI clients would be paying
≈30 per cent rather than ≈18 per cent. On the same assumptions regarding
average loan size, this would imply an additional total interest payment stream
of Rps 1.1 billion (≈ £9.1 million). Discounting again at 9.04 per cent, this
amounts to a present capital value of Rps 12.5 billion (≈ £100.2 million). To
treat these extra interest streams as “costs” in a conventional cost-benefit
analysis sense would, however, be a simplification. Unless micro-finance
providers operate on a cost-recovery basis, a predictable outcome is that, in
the absence of extra (subsidized?) financing, their capital base would
eventually shrink and loan rationing would probably follow; an increasing
proportion of previous clients would be squeezed out, with the alternatives of
“doing without” or resorting to informal sources.
3.4.3 With this caveat in mind, one may set out a figure representing the
estimated net capitalized savings of MFI clients:
1
2
3
4
3.4
Unadjusted gross
discounted value
of “benefits”39
Adjusted
discounted value
of “benefits”40
Discounted extra
“costs” of existing
MFI clients
Net (2 less 3)
Rps (bn)
£ (mn)
146.2
1,169.2
104.4
835.2
12.5
100.2
91.9
734.9
SME clients
3.4.1 A similar approach may be adopted towards the targeted increase in
SME clients. As noted above, their number is projected to increase from
38.
One does not need to assume a perpetual stream. At the discount rate used, about two-thirds of the
“perpetual” discounted value would be reached after ten years.
39.
Assumes that all new SME clients had previously been borrowers in the informal market.
40.
Assumes that half of new SME clients had previously been borrowers in the informal market.
168,233 to 418,617 by 2012. It is assumed again that the average loan size
remains unchanged – at Rps 2.276 million – based on an outstanding amount
of credit to the 168,233 SMEs in 2006 of Rps 382.9 billion. (In fact, the design
of the FIP implies an increase in average loan size, to some Rps 2.39 million.)
As before, it is assumed at first that all the additional SME clients had
previously been borrowing from informal sources.
3.4.2 The implied total portfolio of new loans is Rps 569.9 billion or £4.6
billion. In a stationary state, at a cost-recovery interest rate of 30 per cent, this
would imply annual interest payments of Rps 171 billion (≈ £1.4 billion). If the
same effective informal interest rate of around 100 per cent is assumed as
above, the annual interest payments would, of course, be Rps 569.9 billion (≈
£4.6 billion); and the annual difference between the two interest streams (i.e.,
the savings) would be Rps 398.9 billion (≈ £3.2 billion). If this stream is again
treated as permanent and discounted at a rate of 9.04 per cent, this generates
a present capital value of Rps 4,412.8 billion (≈ £35.3 billion).
3.4.3 If, as before, it is assumed that half of the additional SME clients are
first-time borrowers, while the other half had been borrowing from informal
sources, the present discounted figure would fall to Rps 3,152 billion (≈ £25.3
billion).
3.4.4 By analogy with the previous example, as micro-finance providers
started to charge cost-recovery interest rates, the existing 168, 233 SME
clients would be paying ≈30 per cent rather than ≈18 per cent. On the same
assumptions regarding average loan size, this would imply an additional total
annual interest payment stream of Rps 45.9 billion (≈ £367.6 million).
Discounting again at 9.04 per cent, this amounts to a present capital value of
Rps 508.3 billion (≈ £4.1 billion). The same caution as above should be given
about treating these extra interest streams as “costs” in a conventional costbenefit analysis sense; for continuing to operate on a less than cost-recovery
basis would lead to the same outcome as outlined above.
1
2
3
4
Gross discounted
value of “benefits”
Adjusted discounted
value of “benefits”
Discounted extra
“costs” of existing
MFI clients
Net (2 less 3)
Rps (bn)
£ (bn)
4,412.8
35.3
3,152.0
25.3
508.3
4.1
2,643.7
21.1
3.4.5 More details of a sensitivity analysis reflecting different proportions of
new MFI and SME clients who are first-time borrowers are set out in
paragraph 4 below.
3.5
An alternative approach
3.5.1 The above methodology has produced what may be regarded as
unreasonably large “benefits”; and, strictly speaking, they may not be
“economic” in the conventional sense. A conventional economic appraisal
depends on an output to be valued. The outputs of the FIP, in this sense,
would be the goods and services which the micro-finance clients produce with
the funds that they borrow; and the costs would be the costs of the inputs
purchased with these funds (all valued at shadow prices). Such an appraisal
could be undertaken (perhaps on a sample basis) in the course of programme
monitoring, but is hardly feasible in advance.
3.5.2 An alternative, and very simplistic (even discredited), approach would
be to make use of an estimated incremental output:capital ratio, and to
assume that this characterised the investment generated by the FIP. In the
case of Pakistan, real GDP has been growing at some 6 per cent, while the
investment ratio (I/Y) is some 17.4 per cent. These ratios give an incremental
output:capial ratio of 0.34. The new investment among MFI and SME clients
in the above examples, i.e., of £151 million and £4.6 billion, respectively,
totals some £4.7 billion (≈ Rps 588 billion). With an incremental output:capital
ratio of 0.34, this would generate an annual income stream of £1.6 billion (≈
Rps 200 billion). When discounted as above, these give present value capital
sums of £17.7 billion and Rps 2,212 billion, respectively. These estimates are
comparable with those derived with the previous methodology.
3.6
Other sources of benefit
3.6.1 The above attempts to quantify the benefits of the FIP indicate that, if
the expected results are realized from the two components discussed, their
value could be a large multiple of the likely costs of the programme. (In fact,
the full costs of the FIP are not available for purposes of this exercise. The
FIP Design Report, from which data were taken for the purpose of estimating
programme benefits, gives figures only for the prospective DFID contribution,
i.e., £44.5 million, not for the full cost of the programme. Other donor
contributions are likely, as is, presumably, a contribution from the GOP.)
Information was not sufficient to attempt to account for other elements of the
FIP, e.g., the rural and agricultural aspects.
3.6.2 Another source of potential benefits is the impact of training and
capacity building under the FIP. In principle (and, no doubt, in practice)
personnel whose skills and knowledge have been enhanced through training
would be in a position to command higher salaries (not necessarily in the
institutions where they worked at the time of being trained). Figures are not
available of the numbers and grades of personnel to be trained, nor of
salaries currently or prospectively earned. The potential benefits could,
however, be estimated during FIP implementation and monitoring.
4.
Sensitivity analysis
4.1
The following table sets out the results of assuming a range of
proportions of new MFI and SME clients who are first-time borrowers, i.e.,
who had not previously been borrowing from informal sources.
Proportion of new clients who were
not previously borrowing from
informal sources
0
25
50
75
100
Present value £ million
Micro-finance
SME clients
clients
1069.0
31,235.9
902.0
26,192.7
735.0
21,149.6
567.9
16,106.4
400.9
11,063.3