Pakistan has a separate legal framework to govern the microfinance
activities of the Microfinance Banks (MFBs). The MFBs are
licensed and regulated by State Bank of Pakistan. Considering
the separate needs and dynamics of microfinance, SBP has in
place a separate regulatory and supervisory framework for
MFBs. Since its creation, the policy framework has seen various
improvements on the basis of feedback of key stakeholders
and assessment of the evolving needs and conditions of the
sector. To promote the mainstreaming of microfinance into
overall financial system, SBP encourages creation of new MFBs
and transformation of existing operationally sustainable MFIs
into MFBs. The presence of a large potential market and availability
of an enabling policy environment offer the opportunities
for both social and commercial investors to explore this segment
of the financial market.
The growth and sustainability continue to be the two guiding
objectives for the development of the sector. SBP is fully
cognizant of the fact that pursuing these two objectives concurrently
is a challenging task. This requires vision of sponsors /
management, deep understanding of the target market, viable
business model, appropriate organizational structure, and
management capabilities to adopt innovation in products &
delivery channels. All the prospective investors need to gain
deep understanding of the local microfinance banking industry
vis-à-vis its performance & potential, and challenges
& incentives. Moreover, the promoters of prospective MFBs
should also dedicate adequate time and energies to explore
the learning and innovations that are occurring rapidly across
1. The Licensing, Regulatory & Supervisory Agency
The licensing, regulation and supervision of MFBs established
Ordinance 2001 has been entrusted to State Bank of Pakistan.
No institution/person can commence operations as Microfinance
Bank unless granted license by the State Bank under section
13 of the MFIs Ordinance 2001.
2. Structure of Licensing Policy
Licensing requirements for establishment of an MFB may be
classified into two distinct categories: (a) new MFBs, and
(b) Transformation of MFI into a MFB. The requirements for
licensing of a new MFB have been given in Section-I. These
requirements would apply equally to the MFI intending to transform
into MFB. In addition, transforming MFI would also follow
additional requirements as laid down in Section-II. The Section-III
provides guidance on the process flow of the licensing / transformation
relating to MFB.
Requirements for setting up a new MFB and transformation of
MFI into a MFB
II. Additional requirements for transformation of MFI into
III. Process Flow Chart for Grant of License
Section - I
Requirements for setting up new MFB
And transformation of MFI into MFB
1. Who Can Apply for a License for Establishing Microfinance
a. Institutions which have demonstrated successful microfinance
experience as an MFI locally or globally. Local microfinance
institutions (MFIs) can transform their existing MF operations
into a MFB (Details are given in section-II).
b. Institutions having large distribution network and / or
Person or group of persons
Any person or group of persons, Pakistani or foreign national,
having requisite financial and managerial capacity and commitment
to the financial sector, have to first establish an MFI for
at least three years in order to become eligible for MFB License.
However, in extremely exceptional circumstances, where individual
sponsors have long exposure/experience of Micro/Agriculture/SME
Finance and/or other related areas, SBP may consider them
for issuance of an MF Banking License
In all the above cases, the business proposal of the proposed
MFB should clearly indicate the commitment towards providing
inclusive banking services to the target market and generating
funds / deposits for financing portfolio growth.
Note: No group shall be granted a license for establishing
more than one MFB.
Ineligibility to Become Sponsors
Any person (s) having any of the following disqualification
shall not be eligible to be a Sponsor of MFB:
a) has been convicted by a court of law in Pakistan or abroad
for a criminal offence;
has been associated with any illegal activity especially
contravention of banking and corporate laws.|
c) has failed to meet his/her obligations to banks and other
financial institutions. The Sponsors/Directors shall furnish
names of the banks/DFIs and their branches with which they
have had dealings along with the reports from such Banks/DFIs.
d) has defaulted in payment of taxes- each director and
sponsor shall indicate his/her National Tax Numbers.
e) is or has been associated as Director/Chief Executive
with the Corporate Bodies whose corporate and tax record
including customs duties, central excise and sales tax has
been unsatisfactory. They shall name the corporate bodies,
their bankers and disclose their tax numbers and dividend
record. Those not so associated with Corporate Bodies would
be required to indicate their occupation/profession/trade
and highlight their achievements.
f) is member/office bearer of any political party or member
of Senate, National/Provincial assembly/assemblies
g) In the opinion of the sanctioning authority maintains
adverse reputation regarding integrity and performance.
3. Minimum Capital Requirement:
No MFB shall commence business as a microfinance bank unless
it has a minimum capital as given below:-
i. Nation wide MFBs: minimum
paid-up capital of Rs.1,000 million
ii. Province wide MFBs: minimum
paid-up capital of Rs.500 million
iii. Region wide MFBs: minimum
paid-up capital of Rs. 400 million
iv. District wide MFBs: minimum
paid-up capital of Rs.300 million
minimum paid up capital (free of losses) as prescribed above
is required to be maintained at all times.
4. Capital Adequacy Ratio:
The MFBs shall also maintain Capital Adequacy Ratio (CAR)
equivalent to at least 15% of their risk-weighted assets.
For the purpose of maintaining minimum CAR, MFBs are also
allowed to raise sub-ordinated debt in local currency, subject
to obtaining prior written approval from the SBP. Instructions
on calculation of CAR based on risk weighted assets, and the
terms and conditions for raising sub-ordinated debt are provided
in the BSD
Circular No. 7 of 2008 , as amended from time to time.
5. Minimum Contribution by Sponsors
promoters or sponsor members shall subscribe at least 51%
of the minimum capital and the shares subscribed to by the
sponsors shall remain in the custody of CDC and shall not
be transferable nor shall encumbrance of any kind be created
thereon without prior permission in writing from SBP. The
bank’s sponsor shares (sponsor shares mean 5% or more
paid up shares of an MFB) shall remain deposited in blocked
account with Central Depository Company of Pakistan Limited
(CDC) in terms of BPRD
Circular No. 9 of 2009, as amended from time to time.
Net Worth of Sponsor Directors
declared personal net worth of sponsor directors shall not
be less than the amount to be subscribed by them personally.
The net worth needs to be supported by a duly authenticated
copy of the latest Wealth Statement filed with the Taxation
Department. In case sponsor directors residing in countries
where filing of Wealth Statement is not a requirement of law,
a certificate of Personal Net Worth and General Reputation
issued by an international bank of repute would be acceptable.
This facility would also be available to applicants who had
returned to Pakistan within six months before the submission
of application for grant of license.
The institutions interested in sponsoring an MFB either individually
or in collaboration with other persons shall submit a resolution
of their respective Boards/Governing Bodies covering followings:
Objectives of proposed investment
ii. Amount to be subscribed, and
iii. Nomination of Directors representing the institution
on the MFB Board.
addition to the Board’s resolution, sponsoring institutions
shall also submit latest audited financial statements along
with the auditors’ opinion on the financial repute and
capacity of the institution to make the proposed investment
in the MFB.
7. Public Floatation of Share Capital
In case the sponsors are interested in raising some capital
through public floatation of the share capital, a firm commitment
from ‘A’ rated underwriting firms to underwrite
the public floatation shall be submitted along with the application
for grant of license.
Foreign investors can establish Microfinance Banks either
in whole and / or in partnership with local investors. The
foreign investments shall be governed in accordance with the
Foreign Investment Policy of Government of Pakistan.
Fit & Proper Criteria for Board of Directors / CEO
MFB shall have to meet all necessary requirements for their
directors and CEO, as laid down in the Fit & Proper Criteria,
prescribed by SBP from time to time (BSD Circular No. 2 of
2005/Prudential Regulation No. 26). The MFB shall also meet
all other provisions of aforesaid criteria.
Information/Documents to be submitted with the Application
application shall be submitted on the format prescribed by
SBP, and is given at Annexure-I. The sponsors shall submit
following information/documents with the application:
Sponsors' commitment to subscribe the prescribed capital.
ii. Detailed CVs and proforma information of the Chief Executive
and proposed directors in light of Fit & Proper criteria
issued by SBP as given under Prudential Regulation No. 26
iii. Organizational structure of the proposed MFB
iv. Commitment letters from the Sponsors/Directors, Chief
Executive and Members of senior Management team to subscribe
the committed capital and serve in their respective positions.
v. Job descriptions and detailed CVs of the senior management
vi. Detailed Feasibility Study based on the actual survey
of the target market. The findings of survey should highlight
the viability of MF banking proposal, design of products,
and service delivery channels.
vii. A detailed work plan for mobilizing funds (especially
core deposits) to support the loans growth.
viii. Financial projections for 5 years based on assumptions
which realistically reflect sponsors’ capacity, sector’s
conditions, and future outlook.
ix. Short term and long term business plans to support financial
projections. The plan should highlight the salient features
of the proposed business model, growth strategy, use of
technology options, MIS, and HR development.
x. The draft Memorandum and Articles of Association of the
MFB and the proposed name;
Application Processing Fee:
applicant shall deposit a sum of Rs. 1,000,000/= (Rupees one
million) or equivalent in US dollars along with the application
as processing fee. The fee so deposited shall be non-refundable.
Incomplete applications shall neither be entertained nor returned.
The processing fee in such cases shall also be non-refundable.
The fee may be deposited through demand draft or pay order.
Section - II
Additional requirements for transformation of MFI into
The MFIs (NGOs, RSPs, etc.) have played an important role
especially in the initial development of microfinance sector.
These MFIs continue to be significant players in the sector
today. The legal framework acknowledges their contribution
to the sector and encourages the MFIs having requisite capacity
to transform into Microfinance Banks (MFBs). The licensing
criteria for establishing Microfinance Banks allows MFIs having
potential and capacity to contribute up to 50% of the required
capital in the form of credit and other assets portfolio subject
to review by a Chartered Accountancy Firm from amongst the
To facilitate the MFIs in their transformation process, this
section highlights various aspects of the transformation and
prescribes essential requirements to be completed for the
transformation. However for complete details in this regard,
transformation guidelines may be referred. The MFIs may
apply additional processes to assess their capacity to transform
and ensure a smooth transition from a non-profit oriented
and unregulated to profit oriented and regulated financial
institution for the poor.
1. Underlying Reasons for Transformation
Transformation from MFIs to MFB is a major shift from a non-profit,
socially motivated and donor dependent institution to profit
oriented, self-reliant and regulated financial institution,
which involves cultural, organizational, operational and financial
transformation. Normally one or all of the following objectives
leads to the transformation decision: (a) Access to commercial
capital, (b) Portfolio growth, and (c) Product diversification.
2. Transformation Cost & Transformation Continuum
The transformation involves substantial cost including pre-transformation
cost, regulatory requirements, taxation cost, vulnerability
to external shocks etc. Hence, the decision to transform should
be carefully evaluated keeping in view all the associated
cost and expected benefits. The global experiences show that
the successful transformations take place in a gradual process
which essentially includes following milestones:
i. Adequate experience as MFI and achieving reasonable operational
size & scale in terms of credit portfolio and service
delivery network, reliable accounting & information
system, establishment of internal audit function, review
of books of accounts by external auditors etc
ii. Adoption of professional, business like approach to
manage the MFI's operations and offering demand driven products/services
at cost recovery basis;
iii. Achieved full operational sustainability and satisfactory
progress towards achieving financial self-sufficiency
iv. Ability to access private risk capital and market based
funds for sustainable growth
v. Prepare to operate as profit oriented financial institution
subject to prudential regulations/supervision
vi. Have acquired /developed reliable software to support
the existing operations.
vii. Preferably be rated by a reputed credit rating agency.
The MFIs willing to transform into MFB should assess their
respective positions in the transformation process and accordingly
decide to proceed further.
auditors/consultants shall review the governance structure
of the MFIs, the composition of its Board of Directors/Governing
Body, the criteria & eligibility for election/selection
as directors, the capacity and understanding of the Board
about MF dynamics, the members’ commitment with the
mission and objectives of the MFIs and their willingness as
well as capacity to contribute resources/funds to the new
entity’s capital. They shall also review the decision
making process in MFIs and the role and effectiveness of the
Board in developing professional and business like environment
and culture in the MFI. Further, the auditors/consultants
shall recommend changes, if any, required in the composition
and skill mix of the Board keeping in view the objectives
that an MFI would set in terms of its transformation into
an MFB. The recommendations would also take into account the
legal and regulatory requirements.
4. Recommendation for Transformation
In addition to the findings of institutional assessment, the
auditors/consultants shall exercise an objective analysis
of macroeconomic conditions, legal and regulatory environment
for the MF sector, and future outlook of the sector. Based
on this thorough analysis, auditors/consultants shall recommend
that whether the MFIs should go for transformation. They shall
also advise on the future course of action if they recommend
in favor of transformation.
5. Transformation Decision
MFIs’ Board on receipt of the institutional assessment
report by audit/consulting team, shall review the report and
its recommendations and make a decision to go for transformation
or otherwise. In case of decision in favor of transformation,
the Board shall authorize preparation of proposal and application
for submission to State Bank of Pakistan for grant of license
to operate as Microfinance Bank under MFIs Ordinance 2001.
The resolution of the Board shall also be submitted to SBP
along with other documents. In preparing the proposal, the
MFI must review the requirements as laid down in Section –
6. Information/Documents for Submission
The MFI shall submit the application as per the procedure
given in the Section-I. The additional requirements in the
application are given as follows:
i. The application should be duly filled-in and signed by
the person as authorized by the board of MFI
ii. Institutional Assessment Report prepared and completed
as per the guidelines given in above paragraphs
iii. Board Resolution to go for transformation along with
iv. Detail of assets & liabilities to be transferred
to the MFB - the transfer shall be admissible at value assessed/determined
by the audit/consulting team during institutional assessment
Process Flow Chart
NOC for Incorporation with SECP
The sponsors shall submit the application complete in all
respect including the processing fee to the Director, Banking
Policy & Regulations Department, State Bank of Pakistan,
Karachi for grant of license to operate as MFB. The State
Bank shall process the application and if satisfied with the
quality of the proposal of the proposed MFB, shall issue NOC
to the sponsors for incorporation of the proposed bank as
a public limited company. In case of weaknesses in the proposal
and / or incomplete information, the sponsors will be given
an opportunity to improve the proposal and take steps to address
the concerns raised by SBP. The NOC will be issued if proposal
etc. is improved to the satisfaction of SBP; the application
will be declined otherwise.
2. Grant of License
receiving NOC, the sponsors shall apply to SECP for incorporation
as public limited company. After incorporation of the company,
the sponsors shall submit the incorporation certificate to
SBP. The State Bank shall grant the license subject to receipt
of clearance from security agencies and CBR etc.
3. Commencement of Business
MFB shall commence operations within six months of the grant
of license by SBP. After grant of license the sponsors shall
subscribe the committed capital and obtain certificate of
commencement of business from SECP. The licensed MFB shall
then apply to SBP for grant of licenses for opening branches/places
of business under branch licensing policy for MFBs.
4. Compliance with Legal Framework & Prudential
Regulations for MFBs
The company granted license to operate, as MFB shall comply
with the provisions of Microfinance Institution Ordinance
2001, Rules/Prudential Regulations framed and SBP directives
issued/to be issued from time to time