In 2000 when ADB approved the Microfinance Sector Development Program for Pakistan, the country’s financial system was barely serving poor and low-income households despite the fact that the potential market consisted of over 6.3 million households by conservative estimates. Commercial banks were not involved beyond experimental credit projects, and financial institutions engaged in development work excluded the poor who had no assets. There was no legal framework for specialized microfinance banks though nongovernment organizations were making a concerted effort to provide microcredit in selected areas on a small scale. The poor were compelled to rely on informal markets. It was clear that a proper legal framework was needed for formal financial services for the poor.
It is in this context that the Government of Pakistan with ADB assistance formulated the Microfinance Institutions Ordinance of 2001. It allows the establishment of regulated microfinance institutions at three levels—district, provincial, and national—to integrate microfinance into the broader financial system and to create possibilities for institutional diversity. The ordinance assigns the State Bank of Pakistan authority for licensing, regulating, and supervising microfinance institutions.
Two microfinance banks with licenses to operate nationally have been established since the introduction of the ordinance, and a group of potential investors has completed a market assessment for establishing a microfinance bank to serve the urban poor. Also, the state bank has begun to play a more proactive role to develop a comprehensive system and the capacity to regulate and supervise microfinance institutions effectively.