Country-Level Effectiveness and Accountability Review (CLEAR) with a Policy Diagnostic: Pakistan

At the request of eight development agencies and the governor of the State Bank of Pakistan (SBP), CGAP conducted a Country-Level Effectiveness and Accountability Review (CLEAR) combined with a Policy Diagnostic in Pakistan in November and December 2006. Based on interviews with over 100 people in Pakistan, including staff from the central bank and various government ministries, as well as funding agency representatives and microfinance managers and clients, the report provides a snapshot of the Pakistani pro-poor financial sector. It also analyzes government's and funders' contribution, both positive and negative, to the three levels (micro, meso, and macro) of the financial system. Finally, it suggests recommendations for two separate, but closely linked, types of actors: international funding agencies and government agencies. Microfinance in Pakistan, to date, has been largely regarded as a social service rather than a financial service. Institutions that offer microfinance programs often do not clearly separate them from social programs. Many microfinance providers have staff with strong social sector backgrounds, but little financial sector expertise. And the emphasis on providing immediate assistance to target groups rather than on providing ongoing access to financial services means that microfinance programs have not achieved sustainability, despite large injections of development funds (estimated at close to US$ 400 million over the past five years). Funders and the Government of Pakistan (GoP) have missed an opportunity to create a strong and inclusive financial system as a result of an ambivalent attitude toward sustainability and a lack of commitment to interest rates that cover costs. However, today, heightened interest on the part of government and several new donor projects offer the opportunity for a new direction.The CGAP CLEAR with a Policy Diagnostic makes several recommendations on how funders and government of Pakistan can support a more sustainable model for expanding financial services:

• Insist on sustainability. Funders must not encourage institutions to pass funding subsidy through to clients in the form of below-market interest rates. They should support specialized microfinance providers and insist on full cost-recovery interest rates in their funding agreements with microfinance providers.
• Encourage innovation, new actors, and new approaches. Funders should create an international tender to attract experienced microfinance players (to build greenfield banks, for example) and support technological innovations, such as mobile phone-based financial services.
• Promote a commercial wholesale market. Donors who fund the Pakistan Poverty Alleviation Fund?s microfinance activities should consider whether and how to provide fresh funds for the microfinance component. They should help PPAF spin-off its microfinance lending operations while developing incentives for commercial banks to lend to microfinance providers.
• Diversify use of funding instruments. Funding agencies (private and public) should spend more money on capacity building rather than funding large credit lines through government. They should adapt to market needs by offering a palette of instruments, with a focus on those that provide incentives for savings mobilization.
• Create a joint technical assistance facility. During the take-off phase of microfinance, donors should make high-quality, flexible, and demand-driven technical assistance available, possibly through a joint facility.
• State Bank of Pakistan should focus on regulation and supervision as a core role. SBP is the government agency in Pakistan with the most knowledge about microfinance. It has a specific mandate regarding regulation and supervision. It should focus on this core mandate and function, while spreading good practice principles within the GoP.
• Delineate government's appropriate role as facilitator. The GoP has a crucial role to play as a protector and a promoter of microfinance, but it should not provide microcredit directly to clients.

See the full report for detailed findings and recommendations for how funders and government can help microfinance reach greater scale in Pakistan.