Uncertain political and economic environment, high inflation, rising poverty, over indebtedness, absence of credit bureaux are some of the factors that led to a crisis situation in Pakistan's microfinance, said Kashf Microfinance Bank CEO Ghazanfar Azzam, in an exclusive interview with Business Monitor. Karachi and Lahore-based Kashf Microfinance Bank Ltd (KMBL) in Pakistan started operations in Oct 2008 though the Kashf Foundation initiated its micro-finance programme in 1996 based on the Grameen methodology With 15,200 individual borrowers, the microfinance bank has a loan portfolio of Pak Rs 438 million ($5.1 million).

It has 55,000 deposit customers with total deposits amounting to Pak Rs 325 million ($3.8 million). KMBL has 27 real-time online branches in three most populous provinces of Pakistan - Punjab, Sind and N.W.F.P., with 450 staff members. Here are the excerpts from Ghazanfar Azzam's interview with Business Monitor.

BM. A recent report from CGAP says that one of the reasons of microfinance crisis in Pakistan could be attributed to high growth. What is your opinion about the findings?
Ans: It was due to a combination of factors and high growth was one of them. Uncertain political and economic environment, high inflation, rising poverty, over indebtedness as there were no credit bureaux also contributed in disturbing the environment. However, what triggered the crisis was meddling by newly elected public representatives in need for cheap popularity who were later on joined by crooks selling fake court and government orders announcing that loans had been written off.

I think it needs to be seen in the context. The environment was already ripe for this as the new government didn't know how to handle such situation . Food inflation was so high, utility prices were raised time and again, fuel prices were sky-rocketing and due to lack of electricity and other shortages, people were hard pressed. The ground was ripe for the new breed of politicians to meddle and they did meddle. Hence, the culture of loan remission came into picture as governments used to do when banks were in the public sector. So, 2008 was a very difficult year for people and the country and political intervention was the last straw.

Undeniably, there was a rapid growth of microfinance in the last few years and in some urban areas it had resulted in over indebtedness but the institutions didn't have adequate capacity to confront a situation like this. Loan officers were good at lending but not in recoveries where whole community ganged up and refused to pay.

In fact, Microfinance Banks are in a better position to deal with such crises due to risk management structures in place and tight regulation. MFIs were and are much simpler organizations lacking tools and resources to fight organized defiance. In fact, group lending started working against MFIs and even the groups that used to provide social collateral started working against the institutions en-block.

BM How do you see the relevance of Islamic microfinance institutions? Do you have any plan for piloting /implementing such operational practices?
Ans: Whether Islamic or traditional, microfinance institutions and banks need to offer efficient and need-based financial products and services at affordable and competitive prices. Other things being equal, there is a significant segment of population of Pakistan that will welcome Islamic microfinance. However, people, barring a minority, will not go for Islamic finance or products if these are not competitive and offer a real advantage to consumers.

BM Please share your learning and comparative experience before and after Banking licence.
Ans: We are already offering five depository products based on research and feedback received from the market. We are also adding more products on the lending side. We do offer realtime online transfer of funds and are about to offer pay orders, bank drafts and ATM facilities to our customers. Going forward, we are actively looking at increasing our outreach through kiosks and branchless banking models.

BM What is current equity holing structure of Kashf microfinance Limited? Any new equity investment on Card?
Ghazanfar: Kashf Holidng Company holds 51% shares, followed by IFC (19%) and 10% each by Women's World Banking, ShoreCap Exchange (Both US) and Triodos Bank (Netherlands). We are looking at the possibility of raising more capital.

BM Your bank has achieved the fastest growth in Pakistan compared to your peer banks. What are the factors attributed to such growth?
Ans: Kashf did have experience in microlending and there is tremendous demand in Pakistan as coverage of microfinance is hardly 7-8%. Similarly, on savings side, commercial banks do not want mainstream population with small savings to flood their branches and their policies are designed to restrict their services to people who have substantail savings. On the contrary, Kashf Bank has designed products that help people with no money to build their savings over a period of time. This strategy is helping us to bring large numbers of customers in our fold.

BM We would you like to learn from your personal experience, why did you join the Microfinance Sector, how rewarding it is for you?
Ans: Commercial banking in Pakistan is very well developed, courtesy a large number of national and international banks. However, commercial banks have four million borrowers in a population of 170 million. Coverage on the savings side is also 10-15% of the adult population. When I realized, after working for banks for over 20 years that banking is only for the elite and the rich, I became seriously interested in microfinance.

BM. Would you like to share with us any other factors associated with microfinance?
Ans: Access to financial services along with Education and Health plays a key role in economic and social development of a society. We lag behind in all three. Therefore, Education, Health and Microfinance should be top priorties for the policy makers in countries like ours.