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STATE BANK OF PAKISTAN BANKING SUPERVISION DEPARTMENT KARACHI.

BSD Circular No.18
October 14, 2002

The President (s),
Micro finance Banks/Institutions/Khushhali Bank

Dear Sirs,

PRUDENTIAL REGULATIONS FOR MICRO FINANCE BANKS/INSTITUTIONS

In exercise of the powers conferred under the Khushhali Bank Ordinance 2000 and Microfinance Institutions Ordinance, 2001, the State Bank of Pakistan is pleased to issue the Prudential Regulations for Microfinance Institutions/Banks with the objective to ensure that the MFIs/MFBs operate in a safe and prudent manner. The Regulations have been developed after active consultation with the domestic as well as international Microfinance Practioners/Experts/Consultants to ensure their responsiveness with the very nature of business of MFIs/MFBs. These Regulations shall be applicable on operations of Microfinance Banks / Institutions, including Khushhali Bank, and shall come into force with immediate effect. These will replace the existing Microfinance Bank Rules, 2000 circulated vide BSD Circular No. 29 dated October 13, 2000.

Please acknowledge receipt.

Yours faithfully,

-Sd-
 (JAMEEL AHMAD)
Director

Prudential Regulations for Microfinance Banks/ Institutions

1. These Regulations shall be called Prudential Regulations for Microfinance Banks/Institutions.

2. These regulations shall be applicable to all Microfinance Banks (MFBs)/Microfinance Institutions (MFIs) licensed by the State Bank of Pakistan.

3. Definitions- (1) For the purpose of these regulations, unless there is anything repugnant in the subject or context:
(a) "Documents" include vouchers, bills, promissory notes, bills of exchange, securities for advances, claims by or against the MFB/MFI and other record supporting entries in the books of the MFB/MFI;
(b) "Approved Securities" shall mean registered Pakistan rupee obligation of Federal Government including but not restricted to Pakistan Investment Bonds (PIBs), and Market Treasury Bills (MTBs);
(c) "Equity" means and includes Paid-up Capital, Share Premium, Reserves and unappropriated profits of the MFB/MFI;
(d) "Exposure" means Microfinance facilities provided by the MFB/MFI including both fund based and non-fund based;
(e) "MFIs/MFBs" shall mean companies incorporated in Pakistan and licensed by the State Bank to mobilize deposits from the public for the purpose of providing Microfinance services;
(f) "Deposit" means the deposit of money, repayable on demand or otherwise, accepted by an MFB/MFI from the public for the purpose of providing Microfinance services;
(g) "Poor person" means person who has meager means of subsistence and whose total income during a year is less than the minimum taxable limit set out in the law relating to income tax;
(h) "Specified Area" means the district, province or the whole country for which an MFB/MFI is licensed to operate;
(J) "Contingent Liabilities" means and includes inland letters of credit, letters of guarantee, bid bonds / performance bonds, and advance payment guarantees;
(k) "Records" includes ledgers, daybooks, cash books, supporting documents and all other manual or magnetic/electronic records used in the business of the MFB/MFI;
(l) "State Bank" means State Bank of Pakistan established under The State Bank of Pakistan Act, 1956.

4. Minimum Capital Requirements
No MFB/MFI shall commence business unless it has a minimum paid-up capital as prescribed in MFIs Ordinance 2001. It shall also maintain equity equivalent to at least 15% of its risk-weighted assets. The risk weights of various assets have been defined at annexure "A".

5. Exposure against Contingent Liabilities
The Contingent liabilities of the MFB/MFI for the first three years of its operations shall not exceed three times of its equity and there after shall not exceed 5 times of the MFB/MFI’s equity.

6. Maintenance of Cash Reserve & Liquidity
(a) The MFB/MFI shall maintain a cash reserve equivalent to not less than 5% of its Time and Demand Liabilities in a current account opened with the State Bank or its agent.
(b) In addition to cash reserve it shall also maintain liquidity equivalent to at least 10% of its time and demand liabilities in the form of liquid assets i.e. cash, gold and unencumbered approved securities.

7. Statutory Reserve
The MFB/MFI shall create a reserve fund to which shall be credited:
(a) an amount equal to at least 20% of its annual profits after taxes till such time the reserve fund equals the paid-up capital of the MFB/MFI.
(b) thereafter a sum not less than 5% of its annual profit after taxes.

8. Depositors’ Protection Fund
The MFB/MFI shall, establish and maintain a Depositors’ Protection Fund or scheme for the purpose of mitigating risk of its depositors, to which MFB/MFI shall credit not less than 5% of its annual profit after taxes.

Note: The Khushhali Bank shall continue to contribute 10% and 5% of its annual after tax profit to Microfinance Social Development Fund & Depositors Protection Fund respectively.

9. Restriction on certain types of transactions
The MFB/MFI shall not:
(a) allow any facility for speculative purposes;
(b) allow financing facilities and other Microfinance Services to any of its sponsors, directors or employees including their spouses, parents, and children. The rule shall not apply on loans given to employees under staff loan policy of the MFB/MFI;
(c) without the prior approval in writing of the State Bank, enter into leasing, renting and sale / purchase of any kind with its directors, officers, employees or persons who either individually or in concert with their family members, beneficially own 5% or more of the equity of the MFB/MFI;
(d) hold, deal or trade in real estate except for use of MFB/MFI itself.

10. Maximum Loan Size
The MFB/MFI shall not extend loans exceeding Rs.100,000/- to a single borrower. However, the MFB/MFI shall ensure that the loan amount is commensurate with the business requirements and repaying capacity of the borrower. The MFI/MFB shall also ensure that the loans equivalent to the maximum limit are extended only to those borrowers who have established track record of satisfactory repayment. The MFB/MFI shall formulate well-defined credit policy covering the maximum lending limits, rate to be charged, repayment period, Collaterals etc.

11. Maximum Exposure of a borrower from MFBs/MFIs/Other Financial Institutions / NGOs
The MFI/MFB shall ensure that total exposure of its clients from banks/ MFIs/MFBs/Other Financial Institutions/NGOs etc. does not exceed Rs.100,000/- in aggregate. For this purpose, they will obtain a certificate from the clients regarding borrowings from banks and other MFIs/MFBs/NGOs.

12. Classification of Assets And Provisioning Requirements
(a) Loans & Advances
The outstanding principal of the loans and advances, payments against which are overdue for 30 days or more shall be classified as Non- Performing Loans (NPLs). The unrealised interest/profit/mark-up/service charges on NPLs shall be suspended and credited to interest suspense account. Further the NPLs shall be divided into following categories:

i. OAEM: loans in arrears (payments/instalments overdue) for 30 days or more but less than 90 days
ii. Substandard: loans in arrears (payments/instalments overdue) for 90 days or more but less than 180 days
iii. Doubtful: loans in arrears (payments/instalments overdue) for 180 days or more but less than 365 days
iv. Loss: loans in arrears (payments/instalments overdue) for 365 days or more

Provisioning Requirements
i. General Provision: The MFB/MFI shall maintain a General Provision equivalent to 2% of the net outstanding advances (advances net of specific provisions).
ii. Specific Provisions: In addition to the general provision, the MFB/MFI shall make specific provisions against NPLs at the following rates:
a. OAEM: No Provision required
b. Substandard: 20% of outstanding principal net of cash collaterals
c. Doubtful: 50% of outstanding principal net of cash collaterals
d. Loss : 100% of outstanding principal net of cash collaterals

Note: The MFB/MFI at their discretion can apply more stringent classification and provisioning criteria for NPLs.

(b) Investments And Other Assets
The MFB/MFI shall value its investments on mark-to-market basis. However, in case of investments & other assets where active market does not exist, the MFB/MFI shall make subjective evaluation of such investments and other assets to determine their quality, category of classification and provisions required, keeping in view the risk involved and the requirements of international accounting standards.

13. Rescheduling / Restructuring of loans
The MFB/MFI shall reschedule / restructure the NPLs as per the policy approved by their BOD. The rescheduled/restructured loans shall, however, remain classified unless serviced regularly for 6 months.

14. Writing-off Non-Performing Loans (NPLs)
All NPLs shall be written off, one year after the default in performance. This shall, however, not extinguish the MFI’s/MFB’s right of recovery of such written off loans.

15. Pricing of MF Products and Services
The MFB/MFI shall implement appropriate pricing policies, which ensure access of affordable financial services to the poor as well as operational and financial self sustainability of MFIs.

16. Investment in shares of any body corporate
The MFB/MFI may acquire or hold shares of any body corporate, the objective of which is to provide microfinance services to poor. The maximum investment in such a company, however, shall not exceed 15% of paid-up share capital of that company or 15% of MFIs’ own equity free of losses, whichever is less. For making investment in excess of the 15% limit, prior permission from SBP shall be obtained.

17. Prevention of Criminal Use of MFB/MFI Channels for the Purposes of Money Laundering and other unlawful trade
While considering proposals for extending Microfinance facilities, the MFB/MFI shall make all reasonable efforts to determine the true identity of its clients and shall develop and implement effective procedures and methods for the purpose. It shall interalia obtain copies of National Identity Card or Passport or Driving license etc. from the client which shall be stamped as original seen by the MFB/MFI officer. In far-flung and remote areas where people, particularly women, don’t have identity cards, the MFB/MFI may extend micro-credit by establishing identity through other appropriate means. For Corporate clients, the MFB/MFI shall obtain by-laws, Memorandum & Articles of Association and Board Resolution etc. before extending services.

18. Removal of Records
The MFB/MFI shall not remove from specified area, to a place outside that specified area, any of its records and documents either physically or electronically relating to its business without the prior permission in writing of the State Bank of Pakistan.

19. Management
No member of the Board of Directors of an MFB/MFI holding 5% or more of the paidup capital of the MFB/MFI either individually or in concert with his/her family membersor concerns / companies in which he / she has the controlling interest, shall be appointed in the MFB/MFI in any capacity save as the Chief Executive of the MFB/MFI and that no payment shall be made or perquisites provided to the non-executive directors other than travelling and daily allowances for attending meetings of the Board of Directors or its Committees. Provided further that not more than 25% of the total directors can be paid executives of the MFB/MFI.

20. Places of business
The MFB/MFI shall not open new places of business without prior permission in writing of the State Bank. The approval/permission for opening of new branches/places of business shall be granted in accordance with the MFIs Branch Licensing Policy.

21. Undertaking of cash payments outside the MFB’s/MFI’s authorized place of business
The MFB/MFI shall not undertake any business of cash payments at any place other than the authorized place of business. However, this rule will not apply in case of Mobile Banking where permission has been obtained from the State Bank.

22. Reconciliation of inter-branch accounts and settlement of suspense account entries
The Entries booked in the Inter-Branch Accounts and/or Suspense Account must be reconciled/cleared and taken to the proper heads of accounts within a period of 30 days from the date entry is made in the above-named accounts.

23. Audit and submission of accounts
The MFB/MFI shall get its books of accounts audited in line with the provisions of section 16 of Microfinance Institutions Ordinance, 2001 and submit three copies of the annual audited accounts along with the auditors’ opinion to the State Bank within three months of the close of the accounting year.

24. Internal Audit
The MFB/MFI shall have an Internal Audit Department manned preferably by professionals/persons having prior audit experience in banks/Financial Institutions. The Head of the Department shall report directly to the Board of Directors or to an Audit Committee of the Board.

25. Operational Policies
The MFB/MFI shall formulate operational policies for all areas of operations including micro-credit, investments, internal audit, human resource and rescheduling/restructuring/write-off of loans/advances etc. and shall submit the policies, duly approved by its Board of Directors, to State Bank within 6 months of commencement of its operations.

26. Restriction on Election and Appointment of Directors
No person shall be elected or appointed as a director, an officer or an employee of an MFB/MFI who;
a) has been convicted in an offence involving frauds, breach of trust or moral turpitude;
b) has been adjudged as insolvent or has suspended payment of his debts or has compounded with his creditors;
c) is a defaulter of any bank or financial institution;
d) has been debarred from holding such office under Companies Ordinance 1984 or Banking Companies Ordinance 1962;
e) has been declared to be lacking fiduciary behaviour by the Court under section 217 of Companies Ordinance 1984 at any time during preceding five years;
f) is an office bearer of a political party or a member of Senate, National and Provincial Assembly.

27. Submission of Statistical Returns
The MFB/MFI shall submit to the State Bank, the following returns formats of which are annexed herewith:

28. Scale of Penalties
The scale of penalties for violation of Prudential Regulations for MFBs/MFIs is attached as Annexure "B".

MICROFINANCE BANK/INSTITUTION
*Bi-Weekly Statement Of Affairs as At Close Of Business on ----- (Saturday)

Note: The Unencumbered approved securities held for liquidity purposes were:
a. PIBs xxxx
b. TBs xxxx
c. Others (specify) xxxx
d. Total xxxx

Authorized Signature
Name and Designation

* To be prepared once in every two weeks as at close of business on alternate Saturdays

MICROFINANCE BANK/INSTITUTION

Quarterly Report Of Condition For The Quarter Ended__________

BALANCE SHEET

The annexed notes form an integral part of this Report. _______________________

Profit & Loss Account

The annexed notes form an integral part of this Report.

Notes To The Quarterly Report Of Condition As On The Quarter Ended________________

1. INVESTMENT:

2.1 Loan Type wise Break-Up Of Current And Non Performing Loans

2.2 Summary of Disbursements and Recoveries Made During the Quarter

3. SUMMARY OF OPERATING FIXED ASSETS
Rupees In '000

4. OTHER ASSETS
Income/Mark-up Accrued in Local Currency
Income/Mark-up Accrued in Foreign Currency
Advances, Deposits, Advance Rent and Other Prepayments
Advance Taxation (Payments Less Provisions)
Branch Adjustment Account
Suspense Account
Deferred Cost
Others (To be specified, if material) ___________
Less: Provisions held Against Classified Other Assets______________
Other Assets (Net of Provisions)______________________

5. DEPOSITS

5.1 PARTICULARS OF DEPOSITS BY OWNERSHIP

6. BORROWINGS

7. OTHER LIABILITIES :
Mark-Up/Return/Interest payable on Deposits & Borrowings Unearned Commission and Income on Bills Discounted Accrued Expenses Current Taxation (Provisions less payments) Proposed /Unpaid/Unclaimed Dividends Branch Adjustment Account Others (to be specified, if material)

8. DEFERRED LIABILITIES

9. MARK UP / INTEREST AND DISCOUNT AND /OR RETURN EARNED

10. COST / RETURN ON DEPOSITS, BORROWINGS ETC.

11. ADMINISTRATIVE EXPENSES:

12. AVERAGE ASSETS
For The Quarter Rs. ______________.
Represents The Average Of The Total Assets As Of The Close Of Business On Each Saturday During The Quarter.

13. NUMBER OF EMPLOYEES:

14. NUMBER OF BRANCHES :
Branches At The Beginning Of The Quarter
Add :Opened During The Quarter
Less: Closed/ Merged During The Quarter____________
Total Branches At The End Of The Quarter ____________

15. Schedule Of Maturity Distribution Of Market Rate Assets & Liabilities
As On The Quarter Ended ______________

Rupees In '000

NOTE: Some assets of a MFB/MFI do not have a contractual maturity date. The period in which these assets are assumed to mature should be taken as the expected date on which the assets will be realized.

ANNEXURE "A"
MICROFINANCE BANK / INSTITUTION RISK-WEIGHTED ASSETS ON-BALANCE SHEET ITEMS

ANNEXURE "B"
Penalty Scale for Microfinance Banks / Institutions

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