Improving Financial Access in Pakistan

Technical Assistance Consultants’ Final Report

Project Number: TA 4894
November 2009

Islamic Republic of Pakistan: Improving Access to
Financial Services – Main Report
(Financed by the Asian Development Bank)

Prepared by FINCON Services Inc.

For Ministry of Finance & State Bank of Pakistan

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and
ADB and the Government cannot be held liable for its contents. (For project preparatory technical
assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Improving Access to Financial Services in Pakistan

Final Report

Main Report
(VOLUME I)

MINISTRY OF FINANCE
GOVERNMENT OF PAKISTAN
TA No. 4894-ADB

Submitted by:

Fincon Services Inc.

Canada

November 2009

ADB TA 4894-PAK: Improving Access to Financial Services

Table of Contents

1. INTRODUCTION: OVERVIEW AND BACKGROUND ....................................5
2 INCLUSIVE FINANCIAL SECTOR STRATEGY..............................................18
3 TECHNOLOGY OPTIONS...............................................................................22
4 ALTERNATIVE FINANCING / CARBON CREDITS ........................................30
5 CREDIT INFORMATION BUREAU .................................................................36
6 GENDER..........................................................................................................39
7 ISLAMIC MICROFINANCE..............................................................................41
8 LEGAL AND REGULATORY FRAMEWORK .................................................47

Final Report Page 3 of 50


Introduction – Overview & Background



Final Report

1. INTRODUCTION: OVERVIEW AND BACKGROUND
1.1 The Islamic Republic of Pakistan, a country of 170 million people, is
predominantly agrarian. Out of the total 79 million hectares of land, 22 million are
cultivated. Ninety-seven million people live in rural areas comprising 7 million
households. A total of 22% of the country’s population lives below the poverty
line, comprising 41million people.

1.2 Microfinance services currently reach slightly above one million people as
against a potential client base of 25-30 million. The share of micro credit lending
in the overall supply of rural credit in Pakistan remains around 20%. The total
estimated demand for rural credit is PRs.350 billion as against a credit supply of
PRs169 billion in 2007. Untapped savings (money in the informal sector) are
estimated at PRs.300 billion.

1.3 Cognizant of the constraints associated with the delivery of micro loans, the
Government of Pakistan made microfinance a key theme under its Medium-Term
Development Framework (MTDF), 2005-2010, as well as in the broader financial
strategic directions to achieve Vision 2030. Building a more inclusive financial
sector means deepening the quality of the services to the poor and expanding
the type of coverage offered. To extend outreach, the vision is to create a blend
of economic efficiency and sustainability with an underlying objective to pass on
the benefits to the economically deprived strata of society.

1.4 In order to implement an inclusive financial strategy that encompasses all
financial services providers (public and private, formal and informal) and that
forms an efficient synergistic network, the GoP signed a loan agreement with the
Asian Development Bank amounting to US$320 million to support a reform
program called “Improving Access to Financial Services Program” Phase -1
(IAFSP).

1.5 The program is designed on the basis of a ten-pronged intervention strategy:
I. A national Inclusive financial strategy to integrate all financial services
providers at one objective podium, to deliver a range of financial services
otherwise being delivered either in isolation or under an unplanned
growth;
II. A Public Private Partnership (PPO), to form partnerships and relationships
among formal/informal and public/private entities that are engaged in
financial services delivery.



III. Reducing transaction costs by adopting innovative branchless micro
financial operations that will deepen and expand outreach to the rural
areas with minimum time and cost.
IV. A Credit Information System to increase financial transparency, check
data reliability and operationally integrate features in the broader financial
system; to create an MF-specific credit information bureau for all micro
financial service providers.
V. An Islamic microfinance component where the purpose is to create
products and processes in Islamic micro lending that will tap the vast
majority of productive/transitory poor, who are otherwise reluctant to avail
interest- bearing credits because they are seen as un-Islamic.
VI. Carbon financing to benefit from international carbon credits and to adopt
environmentally friendly micro financial loan products in rural areas that
will save costs and energy with indigenous resource features.
VII. Legal and regulatory reforms, currently supported by SBP.
VIII. A land record and revenue management system that will document land
titles with appropriate GIS layering to enable productive land use through
efficient land records as well as revenue and management system.
IX. Gender policies directed toward supporting the growth of a micro-
entrepreneurial/financial services structure for rural women
X. A financial services capacity building program to develop a broad human
resource base that will serve all of the components above.

1.6 The program was supported by a Technical Assistance (TA) Grant of US$2.5
($0.5 million being the counterpart funds of MoF) to provide advisory services on
the technical components of the program. The TA Team shall support advisory
services that will bring coherence to the national Inclusive financial strategy.

1.7 Consequent to the contract negotiations of 20.8.07 at ADB Manila, FINCON
Services Inc., Canada was selected as the TA Team. In compliance with the
decisions of the negotiations, the TA Team was partially fielded on 20th of August
2007 at Islamabad and Karachi comprising a Team leader and two international
consultants, followed by the successive fielding of International and National
consultants.

1.8 The Ministry of Finance (the Executing Agent) promptly provided workstation for
the TA Team. Thus the Inception Report was assembled under flexible home
inputs of most International consultants, whose onsite availability was
subsequently ensured in full. The inputs of domestic consultants were received at
optimum level. On the concurrence of ADB to extend the deadline of the
submission of the Inception Report until mid-November, the TA Team had the
opportunity to include comments of the Team being on ground since 29 October,



2007. The TA-4894 comprised eight discrete components with multifaceted
interventions vis-à-vis a vide range of implementing agencies. It was thus
deemed appropriate to prepare and develop exclusive reports on each
component in order to arrive at convenient processing and feedback of the
various implementing agencies. As such, in order to give an integrated effect, the
reports comprise of eight mutually exclusive volumes for focused evaluation. The
final version of the inception report was submitted to the Ministry of Finance on
19th March, 2008. The comments incorporated in the inception report were made
possible after having stretched the original scope of work to the requirement of
SBP.

The first interim report was submitted to the Ministry of Finance on 28th April
2008 as an exclusive document as per requirements of IAs for evaluation and
further guidance to elaborate upon and develop the second interim report.

To develop second interim report, a team of international and national experts
was fielded by FINCON Services Inc. Canada from 29th July 2008 to 28th August
2008 simultaneously at State Bank of Pakistan (SBP) Karachi and Ministry of
Finance Islamabad, Pakistan to develop an exclusive second Interim report
pertaining to the period under review; addressing the comments received on the
first interim report and additional deliverables called for by the SBP and other
Implementing Agencies.

A sub-team of three international experts supported by their national counterparts
was fielded at State Bank of Pakistan, Central Directorate Karachi, to provide
dedicated consultative inputs to the second Interim report.

The current draft final report submitted to the Ministry of Finance is the final
version of all inputs consolidated and refined over a period of nineteen months, in
accordance with the requirements of the EA/IAs most precisely relating to the
needed guidance by SBP. Pertinent to add that the current report is a value
added reflection of the growth path of IAFSP (Phase-1) developed and
implemented by the respective implementing agencies including that of EA. The
TA intervention also includes a number of nationwide dissemination and
feedback consultative workshop on the various components of the ADB
Technical Assistance. A team of International / National Consultants was fielded
at Islamabad Ministry of Finance and Karachi SBP simultaneously from 23rd
November 2008 to 21st January 2009 to formulate the Draft Final Report.

Here it may be noted that TA life has been extended by ADB till 20 the June
2009 to include Islamic MF survey providing national wide Islamic MF sector
demand ,supply and response analysis’s for EOIs have already been advertised.
Moreover the draft final report shall also include already concluded final reports
on CIB and Gender MF. The gist of accumulated component-wise inputs is
summarized below:



INCLUSIVE FINANCIAL SECTOR STRATEGY COMPONENT

1st Interim Report Inputs
 In addition to preparation of Implementation Plan as featured in the SBP
strategy “Expanding Microfinance Outreach (EMO)”, the Consultant
provided inputs on detail implementation arrangements of SCUs
 Detailed workable frame work for CIF
 Detailed workable frame work on smart subsidies

2nd Interim Report Inputs
 An implementation plan has been developed indicating the activities to
achieve the benchmarks of officially adopted EMO strategy. The format for
the plan is in accordance with the management information requirements
of SBP and it covers the proposed actions as suggested in the ADB/RRP
and CGAP CLEAR & PD.
 The reports also contain flag notes and general direction on the subject of
Community Investment Fund (CIF) for which the detailed guiding
parameters are also discussed under the legal & regulatory component.
 The use of smart/targeted subsidies in conjunction with CIF vis-à-vis
interventions of the implementation plan are also defined in detail under
legal & regulatory component.

Draft Final Report Inputs
 Updation of Implementation plan as advised by SBP.
 Updation of monitoring formats to monitor the growth of Implementation
Plan.
 (Public) disclosure of social performance / transparent lending and
Consumer Protection.
 Suggest basic principles.
 Set minimum standards.
 Provide worldwide examples (developed and developing countries.
 Recommend role / position of SBP.
 Prepare position paper and guidelines for SBP.
 Discuss and analyze position / role other stakeholders in the MF sector.
 Suggest reporting guidelines on social performance / and (outlines for)
codes of conduct in the area of consumer protection and privacy.



ISLAMIC MICROFINANCE & INTERNATIONAL ISLAMIC FINANCE
ACADEMY COMPONENT

 Evaluate potential for Islamic microfinance by identifying sector
characteristics, experiences, issues and opportunities
 Provide input for the national survey instrument (NSI) to help:
o Identify/develop Shariah compliant products and services
matching demand, acceptability, and business needs of micro
entrepreneurs
o Assess awareness and attitudes of service providers and
communities
 Review of Islamic financial instruments practiced by Islamic banks and
their applicability in microfinance.
 To design and offer contemporary educational, certifications and
professional training programs in Islamic finance all with strong domestic
relevance, and at world class standard.
 To establish formal alliances with reputed business schools, bringing the
best of global management practices and thinking into the curriculum.
 To bring on board a faculty of eminent intellectuals with research and
teaching experience, including those with credible Islamic finance
background. These would be sought from reputed business schools,
training service providers, religious schools and the industry.
 To provide a vibrant research environment through broad based
infrastructure and industry alliances.
 To undertake collaborative research studies with reputable finance think
tanks and research institutions.
 To organize seminars, workshops and conferences to create awareness
of Islamic finance as well as for disseminating research findings.
 To promote focused industry forums to discuss specific market challenges
and lobby for solutions.
 To create and maintain a dynamic knowledge database of information on
best practices, industry issues, Shariah’ rulings, financial market
developments and stakeholders, amongst others.

 The report contains an updated quadrant of Islamic Finance Academy
feasibility report based on the findings and feedback of Islamic Finance



workshop (held at NIBAF Islamabad) and the comments raised by Islamic
Banking Department, State Bank of Pakistan.
 It includes detailed review of the latest developments in the Islamic
microfinance industry, local and international markets as well as additional
information received from various training providers examined in the first
Interim Report.
 A detailed analysis of existing and future Islamic microfinance products,
their operational and financial methodology vis-à-vis international and
Pakistan microfinance sector, is provided in detail.
 The report incorporates the findings of the consultative workshop on
Islamic microfinance wherein the findings of first interim report and draft
survey instrument were presented. In addition, the report also highlights
the opinion of the managements of Islamic banks, MFBs, and MF-NGOs
about possible operating strategy, products and methodologies in the
realm of Islamic microfinance.
 The scope of NSI has also been extended to Mudarabahs to evaluate their
potential to offer Islamic microfinance investments; in view of acute
shortage of resources with MFBs and MF-NGOs, having existence in rural
and remote areas.
 A few alternatives were considered including coordinating Shariah
advisory and Islamic microfinance technology from Islamic banks and
establishing a subsidiary of SBP to provide technical and financial support
to the sector.

 To design and offer contemporary world-class educational, certifications
and professional training programs in Islamic finance all with strong
domestic relevance primarily targeted to the local market with worldwide
accessibility
 To design and deliver comprehensive, broad based, market driven
program offering targeting a range of audience in various fields and
professions
 To offer quality training and research services irrespective of gender, race
and ethnicity
 To establish formal alliances with reputed business schools, to add value
and bring the best of global management practices and thinking into the
curriculum
 To bring on board a faculty of eminent intellectuals with research and
teaching experience, including those with credible Islamic finance



background. These would be sought from reputed business schools,
training service providers, religious schools and the industry
 To provide a vibrant research and training environment through broad
based infrastructure and industry alliances
 To undertake collaborative research studies with reputable finance think
tanks and research institutions
 To organise seminars, workshops and conferences to create awareness
of Islamic finance as well as for disseminating research findings
 To promote focused industry forums to discuss specific market challenges
and lobby for solutions
 To create and maintain a dynamic knowledge database of information on
best practices, industry issues, Shariah’ rulings, financial market
developments and stakeholders, amongst others
 To undertake a bottom up approach for curriculum development, initiating
with foundation level programs and progressing towards graduate,
advance and specialized offering in the course of time
 To build linkages with various financial institutions, end users and
regulatory authorities to provide practical relevance to the programs and
generate better employment opportunities for the candidates
 To uphold the religious context of Islamic finance with equal emphasis on
quality, acceptability and affordability
 Highlighting the opinion of the managements of Islamic banks, MFBs and
MF-NGOs about possible operating strategy, products and methodologies
in the realm of Islamic Microfinance.
 Detailed review of the latest developments in the Islamic microfinance
industry, local and international markets.
 A detailed analysis of existing and future Islamic microfinance products,
their operational and financial methodology vis-à-vis international and
Pakistan microfinance sector.
 Scope of NSI extended to Mudarabahas to evaluate their potential to offer
Islamic microfinance investments.
 A few alternatives including coordinating Shariah advisory and Islamic
microfinance technology to establishing a subsidiary of SBP to provide
technical and financial support to the sector.



TECHNOLOGY OPTIONS COMPONENT

 Confirm BB technical feasibility and options
o Review industry feedback for Guideline recommendations
o Confirm potential BB applications for feasibility analysis and
piloting
o Follow-up interviews & workshop with stakeholders
o Confirm partners for collaboration and piloting
 Establish Framework for Mobile Fund Remittance Pilot
o Identify 1-2 specific BB styles / applications for trials
o Set clear goals and objectives for piloting activities
o Integrate pilot criteria and design for progress evaluation
o Scope geographic and socio-economic coverage
o Identify agent types for training as BB agents and pilot
deployment
 Support implementation of BB pilot
o Ensure pilot activities can be built upon in the future

 Evaluation of Branchless Banking Regulation of SBP March 2008, keeping
in view current market response/analysis to include; potential development
path and future horizon, compared with international experiences.
 Growth path and operational impediments of local and international bank-
led branchless banking activities; a comparative and analytical review.
 Current industry opinion to include; mobile operator, commercial banks,
branchless banking technology providers, recommending possible revision
and direction in the context of commercial inevitability versus piloting and
development assistance.
 Use of smart subsidy targeting to develop commercial viability, triggering
branchless banking growth.

 The existing BB Regulation – Recommendation on a minor adjustment to
the final BB Regulation as issued, dealing with the KYC measures
enacted for sign-up of new customers. The object is to enable greater



flexibility for BB service providers in the precise methodology chosen to
meet the AML/CFT requirements of the SBP.
 Future BB Regulation – Guidance on implementation of future BB
regulation, as the next step to facilitating greater freedom in the
participation of non-bank entities in BB. This would include the allowance
of some form of e-money account for very low level banking (i.e., stored
value accounts that are less than full bank accounts) which is often part of
successful BB services internationally.
 Telecommunications Regulation - Recommendation on a revision to the
Telecommunications Regulation on Branchless Banking that was issued
by the Ministry of Information Technology (MoIT), through the
Telecommunications Regulatory Authority), in order to remove or lighten a
case of “double regulation” on telecom operators related to
interconnection and inter-operability of BB systems.
 Pilot Project - A detailed conceptual design for the piloting the rural
outreach of one or more commercial Branchless Banking initiatives
through a “smart subsidy” competition that would demonstrative the
feasibility of Branchless Banking being implemented and having a
“transformative” impact beyond the natural boundaries of the already
banked urban population.
 BB User Application - Description of a fund remittance component for the
pilot project that would enable an application with very high demand and
utility for rural users.
 Technical Assistance on Pilot implementation – Development of the terms
of reference, specifications and implementation of the pilot project.
 Technical assistance to provide capacity building – Focusing on key target
operating entities/partnerships (e.g., micro-finance banks and telecom
operators) which are ready for BB short-term implementation. These
measures would be in the areas of management and staff development;
BB agent training; focused market study; preparation of promotion and
marketing materials and user guides.
 BB Service level Agreements - Guidelines and template for service level
agreements between bank, telecom operator and/or agents or users and
 Technical standards on system and inter-operability and security – an
outline of the three most relevant and recommended standards to be
followed and specified in Pakistan, namely: Payment Card Industry Data
Security Standard (PCIDSS); Standard for Financial Transaction Card
originated Messages (ISO8583); and Message Authentication Codes
(MAC).



LEGAL & REGULATORY COMPONENT

 Pakistan Post - The Post provides 2 main savings products, one by the
Government Savings Bank and another distributed on behalf of the
Directorate for National Savings. The regulatory and supervisory
implications are not clear. They must be clarified and explained to all
stakeholders;
 Different strategies for further promoting and developing transfer services
by the Post, particularly in rural areas, need to be studied;
 The Post’s provision of insurance and loan products seems to be in
contradiction of existing laws. This should be studied and clarified;
 The data that Post holds on individuals constitute the basis for further
development of financial services, but this situation requires careful
management
 SBP should hold meetings with main stakeholders for the development of
Postal financial services: Finance Ministry, Communications Ministry and
the Post.
 Credit Unions - Credit Unions are considered potentially ideal financial
services providers for rural and low-income citizens and for small
businesses, but they must be fully integrated into the formal financial
sector, and this requires their being financially self-sustainable.
 The central bank should establish & manage a CU program around the
following points:-
o Credit Unions can only become financially self-sustainable when
they fully comply with the core principles of Cooperative
Societies
o The Central Bank does not have the need or the required
resources to effectively supervise all credit unions as most CUs
only intermediate member savings and are small and do not
present a systemic risks;
o Compliance with cooperative principles can only be regulated
and supervised by a cooperative expert. There still seems to be
a Cooperatives Registrar in Pakistan;
o The Central Bank needs to be informed about the financial
services performance of CUs, but only needs to regulate and
supervise them directly, when they operate over a certain level
(number of clients, amount of savings involved).




 Credit Unions: Detailed review and comments on the concept paper
developed by SBP on Credit Unions, providing specific advice on setting
up a Savings & Credit Union program in Pakistan, keeping in view
international best practices and Pakistani experience. Suggesting specific
steps that SBP and others take in setting up of a viable alternate saving &
credit union channel for delivery of financial services at grass root level.
 Post - MFB partnerships: Prepared a strategic review on the Pakistan Post
and Microfinance Bank partnership agreement. Reviewing the pros and
cons of the agreement, regulatory oversight required and suggesting ways
for a viable use of Post Office network for delivery of financial services in
remote and rural areas by Microfinance Banks.
 CIF - Smart subsidies: Provide a specific evaluation and
recommendations for creating a Community Investment Fund that uses
Smart Subsidies for accelerating financial inclusion in the country keeping
in view the international best practices within the context of the Pakistan
financial services structure.
 SBP regulations: Proposed out line review of the MF law and the
prudential regime for MFBs in Pakistan and suggesting areas for
improvement and enhancement of financial inclusion in the country
keeping in view the given prudential norms to explore possibilities

 Credit Unions: Development of an SCU (proposed name Savings & Credit
Unions) action plan with Implementation Plan.
 Review of the legal and regulatory framework (including policies and
guidelines) for Microfinance Banks.
 The legal expert would discuss the Post – MFB partnership with Post and
First MFB, to agree on the second interim report findings and to share
views on future collaboration.
 Following last minute information from SBP and from information gathered
from the media, the expert suggests to SBP to change the title of his
proposal on a possible Community Investment Fund (CIF) to a support
program for increasing financial services outreach.
 Review of Policies and Laws.



CARBON FINANCE COMPONENT

 To develop projects in the identified areas
 To develop strong knowledge & technical resource base to implement
CDM projects
 To raise public awareness and build capacity
 To develop a strong institutional & financial infrastructure in order to
optimize the opportunities and facilitate future growth in the industry
 Develop policies to encourage community / household CDM projects
 Enhance the portfolio of potential products
 Introduce a well-targeted subsidy scheme
 Establish a carbon Fund / Bank

 A new international case study relating to installation of solar panels has
been introduced. This was introduced mainly to demonstrate the CDM
eligibility of solar panels project. This study also has relevance to the
proposed rural electrification program under which AEDB plans to provide
solar panels to 400 villages.
 CER calculation with regard to biogas, solar panels, windmill plants have
been revised based on the information obtained during field visits. Further
some of the calculations have been revised with some updated
information and research studies especially sourced from UNFCC.
 The strategic framework is proposed for the key stakeholders to develop
and implement household and community CDM projects. A capacity
building framework has also been introduced where the training needs of
the key institutions have been identified along with the methodology.
 A detail framework for establishing a carbon fund with cost and financing
structure.

 To provide advisory support regarding international frameworks and
country case studies for channeling carbon credits (grant) financing to the
household level.
 To conduct feasibility study for carbon credits (grant) financing for
households and the poor in Pakistan.



 To include a needs assessment for training and capacity building of
households and external maintenance services.

It may not be out of place to add once more, that the project team went way
beyond the scope of work to accommodate the requirements of the various
implementing agencies. The comments of the EA/IAs are solicited enabling
FINCON Inc. Canada to conclude the final report. The TA-4894 Team records it
special gratitude and thanks to the focal persons of EA and IAs for their
dedicated cooperation and continued support through the course of this TA and
in formulation of this Draft final report.

The details of inputs for each of the components are given in separate chapters.



2 INCLUSIVE FINANCIAL SECTOR STRATEGY
2.1 The TOR of the strategy component of the IAFSP was re-directed towards
formulating a detailed implementation Plan, since a Government approved
strategy was already in place as per 14 February 2007 (the Expanding
Microfinance Outreach or EMO Strategy).

2.2 In order to prepare a comprehensive Implementation Plan, all strategy and policy
support interventions that took place by the end of 2006 and early 2007 were
reviewed (RRP of the IAFSP programme, the CGAP CLEAR&PD, and the EMO
strategy itself.

2.3 All available strategy analysis and recommended interventions were compared,
overlaps removed and ultimately re-grouped, in macro, meso and micro level
activities and interventions. This resulted in the so-called “comprehensive long-
list of activities”.

2.4 The time horizon for the Implementation Plan was adjusted to over the period
2007 to 2010, in order to fall in line with GOP planning cycles. All activities of the
comprehensive long-list were plotted into a Gantt chart in close cooperation with
the SBP staff, leading to the Inclusive Financial Sector Implementation Plan. The
Plan provides activity descriptions, time bound benchmarks and results and
indicates responsible parties per activity. This Plan should be updated per
quarter.

2.5 For monitoring and evaluation purposes, an activity based reporting format was
designed, the so-called “activity status report”. SBP, being initiator and “owner” of
the strategy and the Implementation Plan can use such reporting format for
internal use, but also for reporting to outside stakeholders such as the
Microfinance Consultative Group. For different users of the IFSS Implementation
Plan (such as SBP internal, ADB, Ministry of Finance/Planning commission,
MFCG, general public), different sub-sets of activities can be selected from the
Plan. For all proposed activities, an indication of the funding sources was
provided. It was concluded that through the FIP programme and the IAFSP fund,
sufficient sources are available to fund the Plan. The IFSS Plan was updated as
per the status of January 2009.

Consumer protection and disclosure of social performance
2.6 In connection with 2 macro level activities, the Financial Sector specialist looked
at Consumer protection and disclosure of social performance. Social
performance can be “internally driven” (The institution itself acts socially as it is



established to do so), or “externally expected” (government, general public, see
the institution as an instrument for improving the society or alleviating poverty).
The internally driven version is more sustainable, and externally “enforced’’
disclosure must be limited to a minimum.

2.7 Consumer protection is an aspect of “responsible” financial services delivery.
International initiatives by CGAP, SEEP network and GRI do exist in the area of
Consumer protection and reporting on social performance. Consumer protection
is especially important for microfinance services, due to the character of the
client base.

2.8 SBP has issued prudential regulations and guidelines, a banking ombudsman
has been established, and the association of microfinance providers (PMN) has
issued a code of conduct on consumer protection. Main areas covered are
avoiding over-indebtedness, consumer complaint handling (including redress),
transparency in terms and conditions, and fair debt collection.

2.9 Credit Information Bureaus can play a role to avoid over-indebtedness. At the
same time, consumer privacy issues are at stake. A pilot CIB for the microfinance
sector is being established.

2.10 “Demand side” interventions are underway in the form of funding resources for
financial literacy programmes, and could be further supported through consumer
protection groups strengthening.

2.11 Disclosure or measuring of social performance is happening through collection
by SBP of data from the Banks and Microfinance Banks, through quarterly
reports on Condition. In addition, members of PMN provide quarterly data to the
PMN published reports, which contain elements of social performance.
Recommendations are made to capture data that bear more relevance to social
performance, such as breadth, length, depth of outreach.

2.12 Instead of capturing mostly quantitative data on financial performance, more data
on the quality of microfinance delivery could be captured. Suggestions are made.
Also, a proposed “classification’’ of districts is proposed to judge whether poorer
and remote segments of the population are reached.

Recommendations for Future Implementation



2.13 Selected recommendations for the implementation plan consumer
protection/social performance are:

 SBP/MFD adopts routine updating of the Implementation Plan per quarter.
Mostly for internal use, of the total comprehensive Plan activities, and uses
selected activity progress for its envisaged Development Finance quarterly
report.

 While SBP has its EMO strategy as the approved strategy, it is important that
the GOP, through the Planning Commission, ensures more embedding of the
strategy in broader Policies of the government, such as Poverty Reduction
strategies and Medium term Planning Framework.

 Dialogue with the microfinance sector has always been a corner stone of
proper regulatory framework development in Pakistan. This dialogue is
suggested to continue on a structural basis. The IFSS implementation Plan
can be a core document for the dialogue with PMN and CGMF.

 Consumer complaints handling should preferably be done through proper
handling and redress procedures at Institution level. SBP/CP, Mohtasib and
PMN external handling systems are to be used only as a secondary step.
Efforts in regulation and inspection should be focused on this principle.

 Improved tracking and monitoring of complaints at all levels should provide
feedback on core areas of weaknesses and indicate resources/capacity
needed for redress and handling of complaints (in SBP, and with Mohtasib).
PMN could include summary report on consumer complaints in its sector
review.

 Clarity is needed on the jurisdiction of the Mohtasib for the microfinance
banks. SBP/CP is to look into this matter. Even though PMN members
(includes all MFBs) are envisaging their own redress system, avenues of
redress via the Mohtasib and SBP/CP should be in place.

 For a first step in “aggregate” social performance disclosure, SBP MFD
should publish its own sector review.

 FIP ISF could be used to provide capacity building in the adoption of
worldwide accepted reporting standards on social performance such as GRI.

 A number of improvements to definitions of terms in reporting on Condition
could be introduced. This will improve transparency in reporting and better
year to year comparison of results. Urban and Rural should be clearly
defined, as well as uniformity in use of Branch or district.



 It is recommended to introduce district classification in terms of being more or
less “resource deficit”. Other indicators could be population density,
infrastructure, poverty mapping. Such classification allows analysis of
outreach to, or “inclusiveness” of the poorer segments of the population. It
can also serve as a basis for eligibility for certain supportive measures.
Alternatively, regulatory framework could be differentiated on the basis of
such classifications.



3 TECHNOLOGY OPTIONS
3.1 Following issuance of the Draft Guidelines on Branchless Banking in November
2007, the SBP undertook consultations with the banking and telecom and
technology industries and, as noted above, subsequently issued a Branchless
Banking Regulation on March 31st, 2008. During the period since
commencement of the project (October 2007 to February 2009), the technology
consultant has conferred three times with the SBP, the Ministry of Information
Technology (MoIT), the Pakistan Telecommunications Authority (the regulator)
as well as with the leading players in the financial, telecom and technology
industries, in order to understand all issues relative to the development of
Branchless Banking in Pakistan.

3.2 Objectives for the technology specialist have been to carry out research
internationally, and consultations in-country, from which to identify and examine
the most feasible models of Branchless Banking (BB) for implementation in
Pakistan. Over the course of the project, this task has evolved to be defined
within the context of supporting the development and implementation of the
Branchless Banking Regulation that was released in draft form in November
2007 and formally issued by the State Bank of Pakistan (SBP) on March 31st,
2008.

3.3 There are approximately 25 million bank accounts held in Pakistan’s government
and privately owned commercial banks, though the number of individual account
holders is less than half of this figure. Of these, it is estimated that less than one
third, who are account holders in five banks offering m-banking services, have
access to some form of branchless banking. Furthermore, the transaction level of
mobile banking is to date generally low – until recently representing only 0.01%
of all transactions which take place in the country. As well, the current outreach
of these services into “unbanked” rural and low income areas which could most
benefit from BB services is minimal.

3.4 The consultant believes that the SBP’s issuance of BB regulation, while
representing a relatively conservative “Bank-led” approach, has contributed to
sound and secure market development. Overall, the publishing of clear regulation
provides stability. However, there are some aspects where, in the consultant’s
opinion, additional stimulus to help accelerate the pace of roll-out of
“transformational” BB services would be beneficial. Complementing the
consultant’s initial task therefore was an activity focused on identifying and
defining various recommendations and measures that would help to accelerate
the emergence and development of branchless banking in areas of the country
that are “unbanked” and would benefit from its successful roll-out.



3.5 The consultant developed nine recommendations or specific measures, which
are all described in or attached to this Final Report. These comprise the
following:
(i) The existing BB Regulation - Recommendation on a minor adjustment to the
final BB Regulation as issued, dealing with the KYC measures enacted for
sign-up of new customers. The object is to enable greater flexibility for BB
service providers in the precise methodology chosen to meet the AML/CFT
requirements of the SBP;
(ii) Future BB Regulation - Guidance on implementation of future BB regulation,
as the next step to facilitating greater freedom in the participation of non-bank
entities in BB. This would include the allowance of some form of e-money
account for very low level banking (i.e., stored value accounts that are less
than full bank accounts) which are often part of successful BB services
internationally;
(iii) Telecommunications Regulation - Recommendation on a revision to the
Telecommunications Regulation on Branchless Banking that was issued by
the Ministry of Information Technology (MoIT), through the
Telecommunications Regulatory Authority), in order to remove or lighten a
case of “double regulation” on telecom operators related to interconnection
and inter-operability of BB systems;
(iv) Pilot Project - A detailed conceptual design for the piloting the rural outreach
of one or more commercial Branchless Banking initiatives through a “smart
subsidy” competition that would demonstrative the feasibility of Branchless
Banking being implemented and having a “transformative” impact beyond the
natural boundaries of the already banked urban population;
(v) BB User Application - Description of a fund remittance component for the pilot
project that would enable an application with very high demand and utility for
rural users;
(vi) Technical Assistance on Pilot implementation – Development of the terms of
reference, specifications and implementation of the pilot project;
(vii) Technical assistance to provide capacity building – Focusing on key target
operating entities/partnerships (e.g., micro-finance banks and telecom
operators) which are ready for BB short-term implementation. These
measures would be in the areas of management and staff development; BB
agent training; focused market study; preparation of promotion and marketing
materials and user guides;
(viii) BB Service level Agreements - Guidelines and template for service level
agreements between bank, telecom operator and/or agents or users
(attached as Annex A); and
(ix) Technical standards on system and inter-operability and security – an outline
of the three most relevant and recommended standards to be followed and



specified in Pakistan (attached as Annex B), namely: Payment Card Industry
Data Security Standard (PCIDSS); Standard for Financial Transaction Card
originated Messages (ISO8583); and Message Authentication Codes (MAC).

3.6 All of these were identified at the time of the 2nd Interim Report and were
discussed with members of the Project Steering Group (namely in SBP and
MoIT) and with industry stakeholders. The measures received broad support,
while some were agreed for implementation in a slightly modified fashion than
originally conceived.

3.7 It is worth noting that after a slow start following the issuance of BP’s BB
Regulation in March 2008, the banking and telecom industry were finally making
moves to commence implementation of new BB services in Q1 and Q2 2009,
and the pace of service roll-out of the earliest new entrant is rapid. The
Consultant has made recommendations which have already contributed to
progress. It is also recognized that some of the recommendations can afford to
be implemented in a “measured” and patient way, as and when judged
necessary. On the other hand, some (such as the technical assistance
recommendations) are, in the professional judgement of the Consultant,
important to further development. Some are already useful since they are in the
form of guidance, whereas some (such as the capacity building measures)
should be treated as requiring a response and action from the Steering
Committee and ADB.

While all of the above thus remain as primary recommendations and/or outputs
from the consultancy, they are presented in this Final Report together with some
comments, as appropriate, as to how they could or should be implemented.

3.8 SITUATION ANALYSIS
3.8.1 Key industry stakeholders, including banks, mobile operators and third party
technology providers were contacted three times during the course of the
consultancy. These occasions were November 2007, August 2008 and
December 2008. Discussions centred progressively on their views regarding the
technological and commercial aspects of m-banking (i.e., branchless banking) on
the draft and final Branchless Banking regulation, and on their possible intentions
in the Branchless Banking field and related matters. All mobile operators
contacted expressed strong interest in pursuing a Branchless Banking initiative
with a financial partner in accordance with the Regulation which dictates a bank-
led approach. While several also expressed concerns with the regulation which,
in their opinion, did not fully recognize the market risk (as opposed to the
prudential risk) that they would be expected to bear. Clearly, there were some
factors holding back the mobile operators from rapid investment in BB, even



though at least two of the operators have now made moves to invest in some
form of BB initiative.
3.8.2 Microfinance banks such as Tameer and First Microfinance Banks are keen to
lead or to participate in piloting activities especially in agent capacity
development in current Branchless Banking initiatives in the use of Point of Sale
(POS) machines and mobile ATMs. In addition, the mobile operator Telenor has
taken a controlling interest in Tameer, ostensibly for the purpose of entering into
the BB field in accordance with the BB Regulation. In addition to the SBP, the
Ministry of Information Technology, as the policy making body for
telecommunications, and the Pakistan Telecommunication Authority (PTA), have
taken steps to provide a regulatory framework, which is generally positive except
for one area prescribing enforced interconnection, which the mobile operators
consider to be a double regulatory burden, and to which the consultant, following
discussion with MoIT and PTA has recommended a revision.

3.9 THE BRANCHLESS BANKING REGULATION
3.9.1 Following the issuance of the Draft Guidelines on Branchless Banking in
November 2007, the SBP undertook a consultation process with the banking and
telecommunications industries. The Draft Guidelines had highlighted a number of
AML/CFT security risks from which it had determined the degree of regulation
required. Having considered the viewpoints, concerns and inputs of many, the
SBP’s March 31st Regulation has established a sound and relatively risk-free
framework for the start-up of Branchless Banking activities in Pakistan under a
range of permissible bank-led models.
3.9.2 The regulation outlines clear rules for risk-based customer due diligence, as well
as delineating the roles and responsibilities of key of bank officials within any
financial institution taking responsibility for branchless banking. However, the
regulation allows for the use of banking agents, which could be a wide range of
corporate or individual entities and also managed by telecom operators so long
as the AML/CFT requirements are strictly met under the terms of a strong agency
agreement. The regulation further outlines the potential role of third party
technology suppliers and lays out in detail the requirements for customer
protection and awareness, as well as Branchless Banking procedures.
3.9.3 On balance the Consultant supports the need for regulation which places banks
in the critical role of responsibility for Branchless Banking transactions. The
Consultant also highlights the fact that in the vast majority of international cases,
considered to be leading examples of branchless banking, although the energy
and market leadership usually comes from telecom operators, a banking partner
invariably plays the key role of account hosting and financial management. Of six
leading international cases studied in detail, one was initiated entirely by a bank,
while all of the remainder were initiatives of telecom operators and all but one
have a bank in the critical role of meeting the AML/CFT requirements of their
respective central banks. It is argued that at least three of these cases could



meet the requirements of the BB Regulation, with the relevant agency
agreements in place, and thus be labelled as “bank-led” even though the banks
were not necessarily prominent in the start-up and marketing of the service. In
the light of this, it is important to note that market and brand leadership (most
often carried by the telecom operator) should not be confused with process and
regulatory conformance. The key lesson is to encourage (and not to hinder) the
evolution of BB models to take place with whatever “face” or marketing approach
the telecom – banking partnership would like to use, provided the risk-based
customer due diligence, relevant KYC requirements and AML/CFT controls are in
place and vetted by the banking partner, either directly or through a tight agency
agreement.

The Consultant points out that the strongly bank-centric, as well as bank-led,
approach taken by the BB Regulation will most likely result in relatively slow and
measured BB development. During the final consultant mission in December
2008, it was clear that the telecom operators, whose role is critical to the success
of BB roll-out into unbanked and rural territory, were still positioning themselves
and seeking to negotiate favourable strategic and revenue sharing arrangements
with leading commercial and microfinance banks though, as noted, one has
taken the bold step of acquiring a controlling interest in an MFB for this purpose.

3.10 POTENTIAL DEVELOPMENT PATH FOR THE BRANCHLESS BANKING
REGULATION
3.10.1 Existing regulation - While generally supporting the BB regulation, the
Consultant believes that the first and only revision that is pressing on the existing
Branchless Banking Regulation is to make an adjustment to the Level 1 entry
conditions (KYC requirements), to be better adapted to the realities of small,
remote communities and remote transactions. Assuming such applications will be
conducted by agents, remote from the physical reach of direct bank employees,
the “required conditions” could make better use of existing technological
capacity.
3.10.2 This could, in the Consultant’s view, involve some minor revision to the current
Level 1 KYC / entry requirements. Specifically, it is not unusual for agents in
other Branchless Banking cases internationally to be able to open customer
accounts without the customer physically filling out a form or having a “face-to-
face contact with a designated employee of the financial institution” as the
Regulation states, but for the transaction still to have a good level of control. A
strong example of how this is successfully being implemented by a leading
example in South Africa is discussed in the report. After discussion with SBP on
this matter, the consultant understands that SBP will, on a case by case basis,
consider all reasonable operational and technical proposals on this matter from
banks and/or bank-operator partnerships, provided they meet the KYC
requirements of the bank or banking partner.



3.10.3 Future regulation - The shape of future regulation (i.e., the next phase) should
include consideration of the following, in the Consultant’s view:
(i) Set and clarify legal boundaries between e-money, retail payments and
related stored-value accounts and allow non-bank participation under defined
terms, to be evolved, with possible revision of relevant draft legislation,
discussed in the report, if necessary. While the Consultant has noted that
almost all international BB cases involve a bank-telecom operator partnership
with the bank playing the key security and accounting role, it is also true that
several cases allow the lowest introductory form of BB account (i.e., with the
lowest deposit and daily transaction limits) to be a form of stored value “e-
money” account that does not require a formal bank account to be held by the
user;
(ii) Permit non-bank entities, especially those who have the credibility and
security of having a banking partner in their Branchless Banking service
(which is demonstrated to be the international norm) and who demonstrate
responsibility in their own KYC practices, to be able to offer a “stored value
account” (e-money account) which does not necessarily involve customers
having to have a direct contractual relationship with any bank. Several of the
best international examples offer such a start-up option, while allowing
customers to graduate to a full bank account when they wish, under relevant
terms and conditions.
(iii) Consider the addition of a new Level 0 which would reflect the suggestions in
(ii) above and (iv), or adjust level 1 to have some more permissive conditions
(new Level 0 is preferred).
(iv) Evolve appropriate regulations which reflect the reality of the future direction
of Branchless Banking, while ensuring that the non-bank entities – i.e.,
telecom operator and/or secondary agency manager – fully meet the KYC
due diligence and required AML/CFT standards. It is clear in the cases of G-
Cash (Philippines) and M-Pesa (supported by the Telecom giant Vodaphone)
that their Central Banks have evolved regulatory Circulars for non-bank
entities to fully satisfy AML/CFT requirements that are reasonable and
proportional to the need.

3.11 ADVANCING BRANCHLESS BANKING DEVELOPMENT WITHIN THE
CURRENT REGULATION
3.11.1 Given the new conditions pertaining since issuance of the Branchless Banking
Regulation, in which the entry of banks and telecom operators into the
Branchless Banking arena is going ahead through only tentative though definite
steps at the moment, the Consultant has developed a proposed approach for
piloting and assistance within the accepted Branchless Banking Regulatory
framework, with the following objectives:



1. Encourage accelerated entry to Branchless Banking / m-banking by both
banks and MFBs;
2. Expand the frontiers of current reach, to the outreach target clientele, i.e.,
the unbanked and rural areas, and products of interest to the rural
population;
3. Facilitate bank – operator joint venturing and partnership, which is an
essential ingredient;
4. Build experience and “maturity” (SBP’s objective) in order to accelerate
also the eventual expansion into new acceptable models (i.e., to non-bank
led models) in a more liberal regulatory future.
3.11.2 A pilot concept with supporting initiatives has been proposed, combining all of the
above elements, by including a mandatory rural expansion, bank – telecom
operator partnership, but also majoring on products of specific interest to rural
clientele, such as small scale savings and payments (Level 1) and remittances,
by means of an m-banking platform. The proposal recommends that the SBP, in
partnership with a funding agency, should offer financial support to accelerate
commercial entry into Branchless Banking / m-banking with specified products,
applications and performance targets, through a subsidy competition. Banks and
telecom operators would be invited to bid for one or more packages of subsidy /
support against a specification that seeks out one or two best-case proposals
from the industry, with good medium to long term prospects for success.
3.11.3 The Consultant has proposed that SBP approach Pakistan’s Universal Service
Fund (USF) to support the pilot concept, since it has several very significant
advantages and could potentially bring rapid movement. The advantages include,
but are not limited to, the facts that:
(i) The USF has been established by the Ministry of IT to spread the benefits
of the telecom revolution to all corners of Pakistan, to promote
development of telecommunication services in un-served and under-
served areas, and to make available services to progressively greater
proportions of the country's population.
(ii) The USF has more than sufficient financial resources available built up
over the last two years by levying 1.5 percent of the revenues of licensed
operators in the telecommunications sector, and has a successful track
record of holding “least subsidy” tender competitions for network roll-out
and ICT services into rural areas; and
(iii) The USF has a “Special Projects” category into which various ICT
services and applications are supported, which could include e-commerce
and m-banking applications.
3.11.4 The Consultant met with the CEO of the USF Company to present the concept of
supporting one or more Branchless Banking / m-Banking pilots. The CEO
showed interest and suggested that the USF’s Board of Directors would probably



consider the proposal favourably if a formal approach was made by SBP.
However, the CEO also expressed the view that the USF would most likely prefer
to consider the proposal, as an investment focused on transformative BB
operations in rural areas, after seeing a BB initiative already introduced into the
urban market place and building up a successful track record there over several
months.
3.11.5 In view of this and in view of the consultant’s assessment that up to three banks
and operators are already planning to commence BB operations in Q1/Q2 2009,
it was concluded to hold the USF based pilot back, but as an initiative ready for
implementation later in 2009 if required in order to increase geographical and
socio-economic outreach, assuming initial commercial steps are taken by
banking and telecom operators, as expected, early in the year.
3.11.6 The purpose of a delay therefore is to allow the industry players first to start up
their BB initiatives and then for SBP (and possibly the Consultant) to monitor the
need for intervention to accelerate progress of the services into unbanked and
rural territory.

3.12 SUPPORTING ACTIVITIES
The report also includes several activities in support of the pilot concept and
growth of BB generally which will provide, among other things, the pilot project
development, training and capacity building, and assistance with Service Level
Agreements and Service Agreements as well as technological advice. These
measures were listed in Section 1.1 and guidance are provided on both of these
in Annexes A and B respectively of detailed report on technology options.



4 ALTERNATIVE FINANCING / CARBON CREDITS
4.1 Carbon financing is one of the components and activities included in the TA
program. Carbon financing provides a significant opportunity for direct
investment in sustainable energy production, forestry and agriculture to
mitigate climate change and to address rural poverty. The overall objective of
the carbon finance component is to determine how to enhance the capacity of
the country to channel carbon finance benefits to the household level. Small
projects involving renewable or alternate energy resources from solar,
biomass/biogas, hydro and community forestation carry a great potential and
are among the opportunities for household participation in carbon finance
under the CDM.

4.2 The terms of reference of the carbon financing component are;
 To provide advisory support regarding international frameworks and
country case studies for channeling carbon credits (grant) financing to the
household level.
 To conduct a feasibility study for carbon credits (grant) financing for
households and the poor in Pakistan
 To include a needs assessment for training and capacity building of
households and external maintenance services.

4.3 Various human induced anthropogenic activities such as the burning of fossil
fuel, the depletion of sinks like forests and land use changes have disrupted
the balance in the atmosphere of Green House Gasses (GHGs) such as
Carbon Dioxide, Methane, Nitrous Oxide, HFCs and other naturally occurring
gases. The high concentrations of GHGs are enhancing the “Green House
Effect” in the form of rising global temperatures, thus contributing to Global
Warming or “Climate Change”. As a result, the global temperatures are
expected to increase by about 2 – 4.5 0C over the 21st Century. In South
Asia, average annual temperatures could rise between 3.5 to 5.5 0C by the
end of this century. These climatic changes will have considerable effect (both
positive and negative) on a number of socio-economic sectors.

4.4 In June 1992, over 180 countries at the “Earth Summit” in Rio de Janeiro
adopted the United Nations Framework Convention on Climate Change
(UNFCCC). This was a non-binding legal framework which aimed at
stabilizing GHG in the atmosphere. The Kyoto Protocol adopted under the
UNFCCC in December 1991 made the UNFCCC emission limits binding for
those industrialized countries. Under the Kyoto protocol the developed
countries agreed to reduce their combined greenhouse gas emissions by
5.2% (below the 1990 level) by the first commitment period 2008- 2012.

4.5 Further, a Clean Development Mechanism (CDM) was introduced under
Article 12 of the Kyoto protocol to explore cost-effective options to mitigate the
impacts of climate change. This Mechanism was meant particularly for the
developing countries to initiate climate friendly projects which meet the



developing countries’ sustainable development targets whilst contributing to
the ultimate objectives of the UNFCCC for reducing GHG globally.

4.6 CDM has two main objectives: (i) the project should reduce a significant
amount of GHGs which are additional to the “business as usual” case, and (ii)
the project should contribute to Sustainable Development of the country and
the communities. The second objective has not been given much attention
and its definition remains unclear in many countries. The usually accepted
sustainable criteria that a host country has to improve are
• Social well being
• Economic well being
• Environmental well being

4.7 On the other hand, small-scale community and household-based CDM
projects when implemented particularly in the area of renewable energy
(biomass, wind, hydro, and solar) and energy efficiency (efficient lighting,
efficient cooking stoves) have proved sustainable development benefits for
the communities / households. The uptake and commercialization of these
projects will help in sustainable development and in alleviating poverty in most
developing countries.

4.8 CDM has given Pakistan an opportunity to finance sustainable development
projects which have potential to reduce GHGs in the atmosphere through
investments in energy efficiency, renewable energy, waste management and
carbon sequestration projects. In addition, this mechanism will enable
Pakistan to gain a number of advantages. They are
• Provide energy sources especially for rural community and households’
independent of the GRID energy.
• Provide a source of additional foreign exchange earnings from carbon
revenues. Current market rates are about USD 10 per ton of tons of CO2
Saved (CERS).
• Save foreign exchange through reduction in use of fossil fuels such as
kerosene and diesel
• Help make projects viable with carbon revenues which otherwise would
not have been considered as viable by investors/ lending institutions
• Attract additional private sector financing for local Sustainable
Development priorities, including FDIs.
• Serve as an instrument for the transfer of “appropriate” technology.
• Help solve local environmental issues such as air and water pollution,
municipal solid waste etc.
• Improve the quality of life of women and children



4.9 The Market for CDM has gathered momentum since 2005 after the ratification
of the Kyoto Protocol. By the end of 2007, about 900 projects were registered
with the CDM Executive Board, and 2800 projects are in the pipeline. India
has registered the highest number of CDM projects (34%) followed by China.
More than USD 5 billion transactions of CERs have been done so far and the
global market of USD 25-30 billion per annum can be leveraged through the
CDM by 2012 (World Bank study. According to the International Emission
Trading Association (IETA 2006), in order to strengthen the CDM to meet
current regulatory obligations, 275 – 880 million CERs per annum are needed.
This level of CER production implies about USD 15 billion of investment,
which could leverage green private investment of about USD 100 billion.

4.10 About 53% of the registered projects are in the energy industry (renewable
and non-renewable energy) and the rest are in other sectors. Out of this, more
than half are large scale projects (53%) and the rest are (by definition) small-
scale projects that can benefit from the small-scale CDM modalities and
procedures. The Marrakech Accords of 2001 classified small-scale projects as
those which can reduce less than 15,000 CERs per annum or produce less
than 15 GWh in the case of electricity-related projects and 45 GWh in the
case of projects reducing heat / steam use.

4.11 Pakistan acceded to the Kyoto Protocol in January 2005. So far only one
project, a NO2 abatement project, has been registered. There are about 12
projects in the pipeline out of which 6 have been granted host country
approval. Most of these projects are large scale as per the definition of the
CDM Executive Board. Out of the 12 total projects that are in the pipeline, 8
projects are in the energy sector under power generation and/or energy
efficiency. Only one of these projects is being developed by the World Bank
for community based off the grid micro-hydel generation in collaboration with
the Agha Khan Rural Support Program.

4.12 Pakistan has given high priority to environment protection and conservation
and therefore has incorporated GHG emission reduction strategies into
National Policies. Pakistan has established a CDM cell which functions as the
Designated National Authority (DNA) under Ministry of Environment and has
developed a national operation strategy for CDM projects. The strategy has
defined the eligible sectors and the eligibility criteria for approving CDM
projects in Pakistan.

4.13 Apart from the Ministry of Environment, there are three government
institutions that are directly involved in CDM initiatives. They are the
Alternative Energy Development Board (AEDB), National Energy
Conservation Centre (ENERCON) and the Pakistan Council of Renewable
Energy Technologies (PCRET). AEDB acts as a central agency for
development, promotion and facilitation of renewable energy technologies,
formulation of plans, policies and development of technological base for
manufacturing of renewable energy equipment in Pakistan.



4.14 Under the Medium Term Development Policy Framework, the Government of
Pakistan has tasked the AEDB to ensure 5% of total national power
generation capacity to be generated through renewable energy technologies
by the year 2030. ENERCON which is a department attached to the Ministry
of Environment., serves as the national focal point for energy
conservation/energy efficiency activities in all sectors of the economy, namely
industry, agriculture, transport, building and domestic. PCRET is engaged in
coordinating Research and Development in the field of renewable energy
technologies.

4.15 Most of the projects initiated by these institutions are related to energy saving,
developing alternate energy, fuel switching, waste to energy and
transportation which has high CDM potential. At present Biogas digesters and
mini-hydels offer the best potential in Pakistan. Already two projects, one in
each of the areas are being initiated. As agriculture based country with a very
large animal population, Pakistan offers great potential to develop bio mass
projects which can be a useful renewable and alternate energy source.
However, this potential has so far not been fully exploited despite such
projects being quite common in neighboring countries like India and Nepal.

4.16 Although, several programs for biogas digesters have been launched, none of
them have been implemented very successfully. This is despite most of them
being heavily subsidized by the government. Some of the main reasons
identified for this are the poor quality digesters, lack of training on how to use
these plants, and absence of appropriate financing facilities. Apart from the
current PCRET program, under which about 2000 biogas plants are being
installed, there have not been any major programs initiated either by the
public or the private sector.

4.17 Various studies have identified that the potential for biogas plants in Pakistan
is about 5.0 million. The most potential exists in Punjab and Sindh. The report
recommends that Pakistan initiate a national level program to install about
250,000 digesters in the short to medium term horizon. In this study it is
estimated that a plant with capacity of 3-4 M3 could generate about 3.3 CERs.
It is to be noted that neighbouring Nepal has embarked on a 200,000 nation-
wide biogas program.

4.18 The other sector which offers the highest potential is in the micro-hydel sector.
The geography of the NWFP offers a high potential for the development of
micro-hydels. Already there are several mini and micro hydro projects that are
being developed in this region. But so far except for the project initiated by the
AEDB and AKRSP, none of the other projects have considered CDM
opportunities.

4.19 As Pakistan receives a very high level of solar irradiation, the opportunities for
using solar energy as an alternate source of energy are also very high.
Although the proposed 400 village solar panel programs initiated by AEDB
can be CDM eligible, the CERs generated by a solar panel are very marginal.
Therefore, if this project is to generate viable quantities of CERs, an extensive



scale of operation involving a minimum of about 500,000 households needs to
be considered.

4.20 Potential also exists for small-scale wind power plants to generate energy at
household level and benefit from carbon revenues. However, the baseline and
the performance of such small-scale power plants need to be determined
before embarking on projects on an extensive scale.

4.21 So far energy conservation efforts have been concentrated mainly in the large
scale end of the industrial and commercial sectors. Although some energy
conservation programs have been developed in the agriculture sector, they
have not really cascaded down to the community and household level. Some
of these can be CDM eligible and thus benefit the households. Use of CFL
(energy saving) light bulbs, solar cookers, solar water heaters, and home
insulation systems are some of the energy saving equipment that can bring
benefits to rural communities. Such CDM projects have been successfully
implemented in South Africa and Indonesia. In addition there is energy saving
cooking stoves that have been developed in Pakistan and currently are in use
which can help save energy,

4.22 The minimum amount of CERs needed to trade in the international market is
about 20,000 to 30,000. In all these projects, CERs generated per unit
household is minuscule. Therefore in order to be able to build a critical mass
of about 25,000 CERs many such small units need to be “bundled”. For this
purpose a number of bundling institutions need to be set up to develop this as
single project by accumulating several units.

4.23 The main barriers and constrains for the development of community and
household CDM projects have been identified as
 lack of a good effective intuitional framework to initiate rural household
level CDM eligible projects,
 lack of a technology base to produce renewable / alternate energy saving
equipment, and
 difficulties in raising finances especially for the users

4.24 There are several benefits arising from implementation of CDM projects both
at the community and household levels and at national level. At the
community / household level, the most common benefits are getting energy
for cooking, heating and lighting at lower cost, job creation, skills
developments, general improvement of health & hygiene, all of which help
alleviate poverty and improve the overall living standard of the poor. At the
national level among the key benefits are effective implementation of
international conventions such as MDG, foreign exchange savings on account
of savings in fossil fuel, such as kerosene and diesel, and poverty alleviation
through employment generation.



4.25 It is recommended that Pakistan achieve the following objectives with regard
to the development and implementation of rural community and household
CDM projects over the short to medium term (4- 5 year) period
(i) to develop projects in the areas already identified,
(ii) to develop a strong knowledge and a technical resource base to
develop and implement CDM projects, and
(iii) to develop the institutional and financial infrastructure to enable
Pakistan to optimize the opportunities and facilitate future growth in the
industry

4.26 Some of the broad strategies recommended to achieve these objectives are:
awareness raising, capacity building, development of policies to encourage
community / household CDM projects, development of a strong supportive
institutional framework, develop programs on the most viable sectors, develop
2-3 pilots projects on focused areas (e.g. Biogas, Minihydro, solar panels),
enhance the portfolio of potential products, introduce a well targeted subsidy
scheme, develop financial infrastructure, and establish a carbon fund.

4.27 An institutional framework to facilitate development of household and
community based CDM projects has been suggested. Under this framework it
is proposed that two separate units a) Planning unit to develop the overall
policy and strategy and b) CDM promotional and monitoring unit to address
operational issues be set under the Ministry of Environment.

4.28 The strategic framework proposed in this report will help the key stakeholders
to develop and implement household and community CDM projects. A
capacity building framework has also been introduced where the training
needs of the key institutions have been identified along with the methodology.



5 CREDIT INFORMATION BUREAU
5.1 Five CIBs already exist in Pakistan, four private and one public, all with varying
market coverage and degrees of success. The largest and oldest is eCIB housed
in State Bank of Pakistan. It requires all regulated financial institutions to report
data on all their loans, both disbursements and payments. Interviews with users
of the eCIB expressed differing degrees of satisfaction with the process and with
the eCIB reports.

5.2 With the growth on both the demand and supply side (more borrowers and more
funds to lend) and with the new microfinance lending institutions in place (the
recently established microfinance banks); there remains only one important piece
of the micro-financial infrastructure missing—a credit information bureau covering
the microfinance sector.

5.3 The benefits of extending coverage to the MF sector in Pakistan are extensive.
An MFCIB will
 Extend outreach of credit for low income families
 Mitigate poverty by expanding access to finance to women and to the
entrepreneurial base of the rural areas
 Strengthen the credit culture on both the lending and borrowing sides
 Promote competition among MFPs, which will help reduce lending rates and
extend the maturities of loans
 Identify debtors and delinquents more conclusively
 Provide a black list of bad borrowers
 Assess the real level of indebtedness of clients, thereby avoiding over-
lending
 Result in lower default and delinquency rates
 Reduce the instances of over-borrowing from multiple lenders
 Reduce instances of fraud

5.4 The conditions for creating an MFCIB are present, including a rapidly growing
demand for small credits, strong competition among MF providers, facilitative
government policies, and an awareness among all stakeholders (public and
private) of the benefits of credit bureaus. An MFCIB will be a necessary
ingredient in the Government of Pakistan’s program to extend access to financial
services throughout the country so that poverty levels can be reduced.

5.5 There are many factors supporting the creation of an MFCIB. They include:



 The microfinance sector has huge upside potential (25-30 million borrowers)
which creditors are increasingly eager to tap.
 Near unanimity of opinion among stakeholders that a new CIB spanning the
MF sector is greatly needed and should be created as soon as possible
 The Pakistan Microfinance Network whose members account for 96% of
microfinance lending is squarely supportive of a CIB.
 There is unqualified support at the highest government levels for extending
financial services throughout the country via MFIs.
 The regulatory and legal regimes, which are usually serious roadblocks to a
CIB, are generally favorable in Pakistan.

5.6 At the same time, there are a number of obstacles facing the creation of such a
commercially sustainable entity. The principal ones include
 Gaps and ambiguities in the legal and regulatory environment
 The financial weakness and non-commercial, poverty-alleviation approach by
some significant micro-credit providers
 Inaccurate and incomplete data on MF borrowers
 The lack of skilled staff at microfinance institutions and varying states of MIS
mismatch among MFPs
 Insufficient domestic savings to finance micro-credits, and the prospect that
donor funding by MFPs may dwindle. MF banks need to mobilize deposits
urgently or the market could falter due to a shortage of supply of funds.

5.7 Several of the legal uncertainties facing an MFCIB will be alleviated with the
passage of the Draft Credit Bureaus Act, 2007, which is currently circulating
among ministries. The consultant reviewed the Draft Act and found that it
addressed many key principles and conventions needed in such a law based on
international standards. However, certain omissions and contradictions need to
be corrected. It is recommended that the Draft be amended as indicated and
passed by the new National Assembly as soon as possible.

5.8 Estimates of the potential size and future growth rate of demand for microfinance
in Pakistan widely vary, but active participants are all quite optimistic about the
trajectory. A realistic estimate of the outstanding MF portfolio nationwide at the
end of 2007 would be 1.45 million active borrowers with three million anticipated
by 2010. Questions remain, however, regarding the source of financing for this
growth, since domestic savings are insufficient and donor funding is uncertain.

5.9 Mobile banking (or branchless banking) is likely to grow rapidly in Pakistan and
should enhance the need for and value of an MFCIB, since it will permit the



deepening and broadening of the MFCIB data base. The growth of Islamic
financial products will also help bring the unbanked into the formal system.

5.10 The role of the State Bank of Pakistan in creating, enabling, regulating and
running an MFCIB was a subject of wide discussion. A minority of views favored
SBP’s active participation because the eCIB’s data are more voluminous and the
infrastructure is already in place. It would be a natural extension of current
activities and would save time as opposed to creating a new CIB.

5.11 However, a large majority of those interviewed held that SBP should facilitate the
creation of an MFCIB, but not own it or manage it. This view is in line with
international best practice. When the state plays a major role in directing
economic activity, the results are most often a skewed incentive structure and the
diversion of resources. Nonetheless, it would be appropriate for SBP to take the
lead in policy decisions on CIBs, to license them, to provide supervisory
oversight, to make regulations on data collection and dissemination, and to
ensure consumer privacy and protection.

5.12 In estimating future demand for micro credits, conservative assumptions were
used. The revenues and costs forecast for an MFCIB are based on three
different levels of inquiry fees. In the two cases where fees were set below
market levels, the MFCIB was either not profitable indefinitely or not profitable for
its first four years. When the fee was set at commercial levels (currently PKR
60), the MFCIB became commercially sustainable in the third year even with
large initial capital costs. If modest donor funds or soft loans are factored in to
cover these costs, the MFCIB reaches breakeven quickly and gains credibility
and legitimacy.

5.13 The Lahore pilot project, currently in the planning stage, is an important first step
toward an MFCIB. The obstacles to creating and operating an MFCIB are not
enormous; it is a matter of consensus, marketing and persistence by participants.

5.14 The conclusion of this study is that given the positive market conditions listed
above, an MFCIB is quite feasible in Pakistan, assuming stakeholder
perseverance, clarification of ambiguities in current regulations and laws, initial
donor support, technical training of stakeholder staff, and an upgrading of MFPs’
IT and MIS.



6 GENDER
The Gender Survey was a challenging and timely effort for the IAFSP. Its challenge
arose from the fact that the kind of dedicated and realistic perspective through which
gender equality goals are being looked at has never before been done in Pakistan. Of
course the law and order situation and terror attacks and resource availability for the
survey affected the scope and continuity of the initiative.

Nevertheless, there were several key dimensions which were critically and candidly
discussed and recorded when interacting with MF sector players and clients. The
following is a snapshot of clear and visible gender deficit in the delivery of inclusive
microfinance services as reconfirmed by the survey and updated secondary research
material:
i. Often there is an absence of a clearly articulated gender aware mission and
objectives both in the MF NGOs as well as the MF Banks.
ii. There is inconsistency between presence of gender related strategies and
policies and their implementation
iii. There is absence of gender mainstreaming tools and exercises despite repeated
donor attention and MFP investment
iv. where gender strategies exist formally or informally, there was a lack of
translation of these documents for the provision of “women empowerment”
services,
v. there is a very clear gap in the understanding of the concept of gender sensitivity
among almost all the levels of management in 95% of the MFPs
vi. there is a lax and gender blind monitoring system in almost all MFPs
vii. There is a lack of monitoring of the qualitative and even the quantitative gender
indicators among almost all MFPs.
viii. There is a lackadaisical appreciation of field staff and clientele about the
significance of gender equality in their social and economic development
ix. There is a popular myth among MF practitioners that being sustainable and
profitable means that gender equality goals are ignored or sidelined in favor of
commercially focused goals.
x. There is apparent disaffection of gender equality goals by policy makers both in
the government and donor community

The solutions proposed include:
i. Holding a final event sharing these findings and re-committing ourselves to
gender equality goals and their significance in peace and poverty alleviation.


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