Pakistan unveils guarantees for microfinance

MF Focus, July 17, 2009: State Bank of Pakistan has extended risk guarantee facility for microfinance banks and institutions with a fund of GBP 10 million received from the UK Department of International Development (DFID) which will be kept as reserve for the purpose, said a circular issued by the bank on Friday.
(For a full version of the circular, visit SBP url: www.sbp.org.pk/Guidelines/index2.asp)
The bank has also restrained microfinance interest rate by MFIs not to exceed 16% or two percent above the official discount rate of 14% and ameded its guidelines for the Microfinance Credit Guarantee Facility (MCGF) that was introduced in May this year.
Besides specifying the institutions eligible under the guarantee facility, the bank sought to make provisions of microfinance more flexible for commercial or Development Finance Institutions (DFIs) could reach MFIs or smaller banks. The bank has also advised the lending institutions to provide loans after due deligence of the MFIs and assess their risk profile.
To be administered by SBP, the facility is expected to help banks or DFIs to play a leading role in easing credit constraints of microfinance banks or institutions in their efforts to maximize outreach.
The new facility will provide Partial Guarantee or First Loss Default Guarantee up to a certain limit prescribed by the SBP to reduce credit risk to banks/DFIs entering into lending arrangements with financially and socially sustainable MFBs/MFIs with significant potential to maximize outreach to poor and marginalized segments of the society.
it also allows risk sharing, as Partial Guarantees or First Loss Default Guarantees will provide incentives to participating banks/DFIs to monitor these loans. The structure of the guarantees will enable MFBs/MFIs to borrow in local currency.
The risk coverage will be either 40 per cent of the loss incurred in case of Partial Guarantee or 25 per cent of first loss in case of First Loss Default Guarantee on the principal amount, which the bank hopes will achieve a leverage of up to four times. For a full version of the circular, visit SBP url: www.sbp.org.pk/Guidelines/index2.asp

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