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Institutions providing microfinance services in Pakistan include: microfinance banks (MFBs), microfinance NGOs, and commercial banks, along with government-supported Rural Support Programs (RSPs). MFBs and commercial banks are regulated by the State Bank of Pakistan (SBP). Microfinance NGOs and RSPs, neither of which can accept deposits, are registered by either the Securities and Exchange Commission of Pakistan or provincial authorities. Pakistan has a specialized law for MFBs, the Microfinance Institutions Ordinance, and prudential regulations for MFBs. There are also specific guidelines on Islamic microfinance issued by the SBP. A pilot Microfinance-Credit Information Bureau developed through a public-private partnership among the SBP, the microfinance industry and a private sector credit bureau was launched in May 2010 in Lahore.



Microfinance & Banking

Consumer Protection

Pakistan does not have federal legislation for financial consumer protection in place, despite its elaborate regulatory and supervisory system for the financial sector. The Consumer Rights Commission of Pakistan (CRCP), a non-governmental consumer protection organization, developed a Model Consumer Protection Act in 2001 taking into account the best practices from many countries and launched campaigns for enactment and implementation of consumer protection laws in all provinces. As a result, Balochistan and Punjab enacted their own Consumer Protection Acts in 2003 and 2005 respectively; however, as of 2009, the act has only been implemented in Punjab. Other relevant provincial-level legislation related to consumer protection include the Islamabad Consumer Protection Act of 1995 and the North West Frontier Province Consumer Protection Act of 1997.

Despite the lack of federal legislation for financial consumer protection, the State Bank of Pakistan (SBP) is issuing guidelines in an effort to enhance consumer protection. In 2004, SBP issued BPD Circular No. 17 Guidelines In Dealing With Customers Complaints which sets forth the minimum guidelines for banks and development finance institutions to follow. Loan recovery procedures (such as penalties on default, actions taken for recovering loans by lenders, etc.) are largely unregulated and each financial institution applies its own internal policy in implementing its loan recovery procedures. Although under the Financial Institutions (Recovery of Finances) Ordinance of 2001, a special banking court was established to oversee the loan recovery procedures of the financial institutions, it is uncertain whether microfinance institutions or microfinance banks (MFBs) are subject to this ordinance.

When banks were nationalized in 1974, the Pakistani government assumed responsibility for safeguarding customer deposits. Because a number of banks have been re-privatized since that time, SBP is looking to establish a deposit insurance system to replace the government guaranty. If deposit insurance replaces the government guaranty for most institutions, depositors will have a more limited safety net.

In 1992, SBP established a central Credit Information Bureau (CIB) that collects borrower credit information from its members in order to determine their credit worthiness and prevent over-indebtedness of the borrower. All commercial banks, development finance institutions, non-bank financial companies and MFBs are required to be members of CIB. SBP has also issued the Branchless Banking Regulations of 2008 which include a number of provisions aimed at protecting consumers.

With respect to the microfinance industry, Pakistan Microfinance Network (PMN), which is an association of microfinance institutions, MFBs, NGO-supported institutions, and the Rural Support Program, acts as a self-regulatory organization that oversees the microfinance industry and complements the oversight function of SBP. The SBP issued a set of Prudential Regulations for Microfinance Banks/Institutions of 2007. The regulations make it "incumbent" upon MFBs to "facilitate the borrower in making an informed decision." Thus, MFBs are required to not only point out, but also explain the terms and conditions of the contract to the borrower, and in a local language if required. Education of customers is also a responsibility placed on MFBs. The PMN has also come out with a Code of Conduct. Signatories to this code are member institutions. The Code also lays down consumer protection guidelines that ought to be followed by members. The Code requires that the consumer be made effectively aware of the repayment schedule and amount of debt it is effectively taking on, computing interest into the repayment burden.

Branchless Banking