SBP allows foreign currency microfinance loans

KARACHI: The State Bank of Pakistan has allowed microfinance banks/institutions (MFB/Is) to raise foreign currency loans from international financial institutions/donor agencies so that they are able to meet their funding requirements, DawnNews reported.

According to a Circular (FE Circular No. 8) issued today, the purpose of the loan must only be to finance the loan portfolio of MFB/Is and the borrowing can be raised in major four currencies namely US Dollar, Euro, Pound Sterling and Japanese Yen.

This decision will help microfinance providers’ access to different sources of debt that may offer longer tenor, and in turn reduce their funding risk. The SBP had earlier facilitated the microfinance banks and institutions to raise local currency funding from commercial banks/development finance institutions through its Microfinance Credit Guarantee Facility (MCGF) set up with GBP 10 million funds under its Financial Inclusion Programme. The access to both local and foreign funding by the microfinance sector will greatly help expand microfinance outreach in the country.

The Circular said the minimum tenor of the FCY borrowing should not be less than 2 years while the loan pricing will be based on a reference rate such as London Interbank Offered Rate (LIBOR). Interest rate may be decided on best possible terms, and must be competitive to other options available locally, the Circular added.

According to the Circular, the disbursed FCY funds are required to be immediately converted into Pakistani Rupees and credited to borrowing MFB/I’s PKR account maintained with the concerned Authorized Dealer (bank). Under no circumstances MFB/Is will be allowed to retain such funds in foreign currency, it said.

A draft term sheet agreed between the lender and borrowing MFB/Is should be submitted to the State Bank while approaching for in-principle approval. However, for formal approval, MFB/Is will approach SBP through the Authorized Dealer (bank), the Circular said.

The Circular also binds MFB/Is to ensure that internationally acceptable ‘Know Your Customer’ (KYC) standards for the Lending institutions/lenders are complied. Funding should only be obtained from quality lenders which comply with KYC standards, it said. Any change/deviation in the terms and conditions after obtaining formal approval from SBP will require prior clearance from SBP, the Circular added.— DawnNews