SBP gives microfinance sector the lollipop

The State Bank of Pakistan (SBP) has allowed microfinance providers (MFPs) to mobilise funding from non-bank sources and the capital market under the Microfinance Credit Guarantee Facility (MCGF). Accordingly, revised guidelines on MCGF Thursday were used to all the banks, Development Finance Institutions (DFIs) and the Microfinance Banks (MFBs).
The revised guidelines on MCGF stressed upon the MFBs and MFIs to explore other local currency funding opportunities such as raising capital by issuance of redeemable capital from the capital market, thereby increasing funding availability and diversification of sources. The SBP has been encouraging the viable microfinance providers, both the MFBs and Microfinance Institutions (MFIs) to mobilise local currency funding from banks and DFIs for lending to microfinance borrowers to enhance microfinance outreach. However, it has been observed that funding requirements of MFBs and MFIs have been partially met by the banks and DFIs. The revised guidelines have been issued with a view to further easing the funding constraints of the microfinance sector.
The central bank has advised all banks, DFIs and MFPs to finalise their funding deals under the MCGF and submit their cases to SBP Banking Services Corporation (SBP BSC) for issuance of guarantee as per procedure envisaged in the revised guidelines on MCGF. It may be recalled that the Microfinance Credit Guarantee Facility is a credit enhancement facility to attract long-term and market-based finance for microfinance institutions. MCGF was launched by the State Bank in December 2008, with £10 million funding support from the UK Department for International Development (DFID) under the £50 million Financial Inclusion Programme (FIP) which is being managed by SBP.
The facility offers 25% first loss or 40% partial guarantee (pari passu) coverage to the banks. The facility is focused on market development and has significantly helped in reducing the risk-perception of banks towards the microfinance sector, thus introducing poor borrowers to mainstream financial institutions.
The facility has successfully overcome some funding constraints of the microfinance providers as 15 guarantees have so far been issued, mobilising private capital of over Rs.4 billion from commercial banks for onward lending to around 200,000 new poor and low-income borrowers. As such the facility is now well positioned to mobilise non-bank financing from capital market and further diversifying sources of financing for micro borrowers.
The revised guidelines on MCGF have been issued by SBP through AC&MFD’s Circular No 3 dated; 21st June, 2012. This supersedes all earlier instructions issued in this regard, the circular added.