KARACHI: The bad news is that small savers keeping their tiny sums in microfinance banks enjoy no deposit protection — unlike the depositors of commercial banks — in the event of a bank failure.

The worse news is that the authorities have postponed the extension of the deposit protection mechanism to the microfinance sector, thanks to the recently concluded Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) for $3 billion support.

In a detailed Staff Report prepared by an IMF team for the July 12 meeting of its Executive Board to greenlight the SBA, the Washington-based lender urged the Pakistani authorities to delay the extension of the deposit insurance framework to microfinance banks “until vulnerabilities within the sector” are addressed.

The idea of insuring the deposits of relatively strong commercial banks while letting the more vulnerable micro-savers fend for themselves appears counterintuitive.

IMF wants SBP to address vulnerabilities of this sector

The Deposit Protection Corporation (DPC), which is a subsidiary of the State Bank of Pakistan (SBP), protects up to Rs500,000 per depositor per bank in case the regulator declares it a “failed bank”. Depositors of all 33 scheduled banks operating in Pakistan get protection from the DPC.

The demand by the IMF to postpone the implementation of deposit protection to microfinance bank customers stems from the fact that some of the micro-lenders operate with “capital shortfalls” or other regulatory non-compliance.

The Washington-based lender wants the SBP to not extend the scheme until the weaker banks are either recapitalised or shown the door in an orderly manner.

There’re 12 microfinance banks, which operate at national, provincial and district levels with minimum capital requirements of Rs1bn, Rs500 million and Rs300m, respectively. Not all of them are currently compliant with the capital requirements.

Speaking to Dawn on Friday, Mobilink Microfinance Bank Ltd CEO Ghazanfar Azzam said some players within the microfinance sector are facing undercapitalisation but that shouldn’t become a basis for the exclusion of micro-savers from the deposit protection arrangement enjoyed by the clients of commercial banks.

“There’re commercial banks that remain undercapitalised and yet their clients get deposit protection. I don’t understand the logic of depriving micro-savers of the same facility,” said Mr Azzam who also serves as a director on the board of the Pakistan Microfinance Network, a national association for retail players in the microfinance industry.

He said micro-savers should ideally get deposit protection for Rs500,000 per depositor per microfinance bank just like the customers of commercial banks. Even a cover of Rs100,000 per micro-saver per microfinance bank should suffice at the initial stages, he added.

On their part, the Pakistani authorities have promised the IMF that they’ll continue their efforts to “tackle pockets of vulnerability” in the microfinance sector by asking their owners for “time-bound recapitalisation plans”.

At the end of March, the number of micro-savers in Pakistan stood at 98.1m, up 4.4pc from a quarter ago. Mobilink Microfinance Bank and Telenor Microfinance Bank alone accounted for a total of 81m active savers.

The sum of micro-savings at the end of March was Rs487.5bn, down 5.2pc from the preceding three-month period. This means the average saving balance was Rs4,969, down 9.2pc from the end of 2022.

Published in Dawn, July 22nd, 2023