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Asia-PacificJune 5 2005

Loan lifeline for the poor

First MicroFinance Bank hopes to become a role model in providing loans to the poor in Pakistan. The bank’s president, Hussain Tejany, talks to The Banker.
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Hussain Tejany pauses to think before giving a lengthy explanation about how micro-credit banks ought to be different from mainstream ones. “You are a bank for the poor so you have to have that ingrained in your philosophy. Keep your expenses down and you would survive and also be of service to the poor,” he tells The Banker.

Mr Tejany’s journey from mainstream banking to micro-credit banking has taught him a few vital lessons. As president of Pakistan’s First MicroFinance Bank, established three years ago by the Aga Khan Fund for Economic Development, he says he has often reflected on the relatively small size of his office, which is three times smaller than his previous office when he was the executive vice-president of a large Pakistani bank.

Interest rates matter

Mr Tejany believes that the idea of tackling the needs of the poor is easily defeated when micro-credit banks charge excessive interest rates. One Pakistani organisation trying to promote the idea of microfinance ended up charging annual interest rates of 33%, sharply up from the 18% the First MicroFinance Bank charges its borrowers, he claims.

The bank has so far attracted about 19,000 depositors and 11,000 borrowers, all served through its 23 branches across Pakistan. The geographical spread ranges from branches in Karachi, the southern port city and home to Pakistan’s top businesses, to remote parts of northern areas where the Aga Khan network has been actively promoting development for years.

In its three years since creation, the bank has lent Rs750m ($12.5m) to borrowers. Mr Tejany says that the recovery rate is a spectacular 99.1%, which is markedly higher than any other bank in Pakistan.

“Our model works in large part because the bank is highly decentralised,” he says, referring to an important aspect of management. Consequently, of the bank’s 205 employees, only eight work at its head office in Karachi. The rest are encouraged to establish close ties with members of the communities they target. “If, as a manager, you have a good rapport with the community members, your ability to assess different clients improves vastly,” he says.

Among future plans, one that Mr Tejany says would become the cornerstone of the idea of promoting micro-credit and micro-finance is the concept of creating a first ever micro-insurance company in Pakistan. This is driven by the concept that families of borrowers are struck hard when a borrower passes away, leaving behind unpaid debt.

Expansion plans

In the next three years, the bank is planning to establish at least 20 more branches, concentrating on areas where none existed before, as its network widens across Pakistan. In the near future, the plan is to focus more on a branch in Gwadar, Pakistan’s newest port city close to the Persian Gulf, where a deep sea port has been developed with Chinese technical and financial assistance, says Mr Tejany. The Pakistani government is keen to develop Gwadar as a focal point for future trade with the landlocked countries of central Asia and Afghanistan, through a railway network and a highway, which have yet to be built.

“We anticipated an opportunity in Gwadar and we went for it. The idea was to set up a branch there in anticipation of a future when there’s prosperity there, but there would also be needs for the local poor such as many fishermen,” says Mr Tejany.

Limited reach

He agrees that in the long run, the First MicroFinance Bank would not have a network that is large enough to meet the needs of a sizeable number of Pakistanis in need of loans from micro-credit banks. Almost a third of Pakistan’s population of 150 million is thought to live below the poverty line.

In recent months, the central bank in Karachi has reported rising inflation, which has alarmed a number of economists over increasingly stressful living conditions for Pakistan’s poorest communities. This has strengthened arguments in favour of institutions such as the First MicroFinance Bank.

However, Mr Tejany says: “I realise that the poor need money and there are not enough micro-credit institutions in this country. But we consider ourselves an important trendsetter. We hope just to become a role model that others can look at and then follow.”

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Read more about:  Asia-Pacific , Pakistan