Rules for

The Line of Credit Fund

Under Financial Inclusion & Infrastructure Project

 TABLE OF CONTENTS

CONTENTS PAGE
PREAMBLE 2

1- THE LINE OF CREDIT 3

1.1 Introduction 3
1.2 Objective 3
1.3 Scope 3
1.4 Capital Structure 3
1.5 Duration 3
1.6 Management of the Facility 3

2- OPERATIONS OF THE FUND 4

2.1 Eligibility Criteria 4
2.2 Allocation of Limits 4
2.3 Target Market & Eligibility of Borrowers 4
2.4 Pricing & Recovery 5

3- UTILIZATION & MONITORING 5

3.1 Proper Utilization of the Fund 5
3.2 Monitoring & Reporting of the Fund 5
3.3 Contact Details 5

INTERPRETATIONS & ABBREVIATIONS 7

ANNEXURES

1
 PREAMBLE

In May 2015, Pakistan launched its National Financial Inclusion Strategy (NFIS) to achieve its vision, that
is, ‘individuals and firms can access and use a range of quality payments, savings, credit, and insurance
services which meet their needs with dignity and fairness’. SBP strives to expand financial access to at least
50 percent of adults by 2020. To facilitate achievement of NFIS targets, beside various other initiatives, the
Government of Pakistan has devised a “Financial Inclusion and Infrastructure Project” (FIIP) in
collaboration with the World Bank.

The FIIP aims to contribute to increasing access and usage of digital payments and other financial services
for households and businesses in Pakistan. To achieve the target of improving access to financial services,
the project has envisaged offering of a Line of Credit (LoC) to Microfinance Banks (MFBs) and to
Microfinance Institutions (including Non-Bank Finance Companies (NBFCs)) for on-lending to micro
borrowers/ enterprises.

In this regard, the Government of Pakistan has granted USD 75 million, in equivalent Pak Rupees, to SBP
to establish the LoC for the microfinance sector to contribute towards meeting the liquidity requirements
of the industry.

The LoC will operate through Participating Financial Institutions (PFIs) which will be the implementing
partners of SBP to achieve the project objectives in an efficient manner. This document describes the policy
and procedures governing the LoC facility applicable to the PFIs and the end borrowers.

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 1- THE LINE OF CREDIT

1.1 Introduction
With a view to promote access to formal finance, particularly in the microfinance sector, SBP has
set up a fund for provision of a Line of Credit (LoC) to Microfinance Banks (MFBs) and to Non-
Bank Finance Companies (NBFCs) for onward lending to microfinance borrowers including
microenterprises.

1.2 Objective
The objective of the LoC is to ease the liquidity constraint of microfinance sector and provide
access to long-term market based funding that will enhance lending to microfinance borrowers
including microenterprises and micro housing. The funding will enhance financial inclusion by
easing the liquidity constraints of micro lending institutions through a sustainable and market based
credit strategy.

1.3 Scope
SBP will provide the LoC to MFBs, and NBMFCs to extend loans to microfinance borrowers
including microenterprises and micro-housing as defined by SBP in Prudential Regulations for
MFBs. SBP will also provide LoC to other NBFCs (who are in the business of wholesale lending)
for onward lending to MFBs and NBMFCs.

The LOC will also focus on:

i) Development of products and services catering to micro enterprises and micro housing
sector;
ii) Promoting availability of financial services to women micro entrepreneurs; and
iii) Lending to end borrowers on market-based pricing.

1.4 Capital Structure

The Government of Pakistan has granted USD 75 million in equivalent Pak Rupees through Public
Sector Development Program (PSDP) under the World Bank funded Financial Inclusion and
Infrastructure Project (FIIP).

1.5 Duration
The facility has been established at SBP for a period of twenty-five years to provide a long-term
source of funds to the microfinance sector. However, SBP reserves the right to terminate/ amend
the facility at any time in consultation with Finance Division.

1.6 Management of the Facility

The LoC shall be managed through a Fund Committee chaired by Executive Director, Development
Finance Group. The structure of the Committee will be as follows:

Sr. Fund Committee Structure

No. Designation Status Department/ Group
1 Executive Director Chairperson Development Finance Group (DFG)
2 Group Head Member Foreign Exchange & Development Finance (FX&DF),
SBP BSC
3 Director Member Agricultural Credit &Microfinance Department
(AC&MFD)
4 Director Member Development Finance Support Department (DFSD),
SBP BSC
5 Rep of Finance Member Finance Division
Division/PD
6 Private Sector Member Private Sector/ Market
Expert

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 The Fund Committee will perform following major functions:

 Design and adopt operational modalities (including appraisal framework) of the credit line
to ensure smooth implementation of the facility.
 Approval of limits to PFIs as per the criteria mentioned in this document.
 Periodically review the overall performance of the PFIs with respect to objectives of the
Fund.
 The Fund Management Committee, keeping in line with the PC-1 of the project, may take
steps to encourage off-take of the LoC funds from the sector especially the MFIs.
 Any other function to achieve the objectives of the LoC.

DFSD, SBP BSC shall be responsible for the implementation of the scheme.

2- OPERATIONS OF THE FUND

2.1 Eligibility Criteria

Applications will be invited from all PFIs for allocation of limits under LoC (Annexure-1). The
limits will be assigned to PFIs based on the following:

1- Compliance of Minimum Capital Requirement (MCR) and Capital Adequacy

Requirement (CAR) requirements. (Where applicable)
2- Experience of micro lending.
3- Statutory/ audit reports of last three years. (Where applicable)
4- Ratings assigned by external credit rating agencies. (For MFBs only)
5- Consumer protection policies and procedures.
6- Financial and social indicators to measure the potential of the PFI for achieving the
objectives of the facility.
7- “Environmental and Social Management System” meeting the minimum guidelines
issued by SBP.
8- Commitment to lend 60% of the loans to women borrowers.
9- Repayment Capacity.
10- Adherence to applicable Corporate Governance standards.
2.2 Allocation of Limits
The limits to PFIs will be allocated for a period up to 5 years. After allocation of limits, the funds
will be disbursed immediately. PFIs will ensure utilization of these funds for onward lending to
their eligible clients. Fund Management Committee shall monitor performance of the PFIs on
regular basis viz-a-viz their limits and disbursed funds. Fund Management Committee reserves
the right to enhance, reduce or withdraw the limits based on the performance of the PFIs. For
disbursement of the assigned limits, PFIs will have to sign Finance Agreement with DFSD along
with Demand Promissory Note. (Annexure-2)

NBFCs will also ensure compliance of all the relevant rules and regulations. However, the
disbursement of the limits will be subject to submission of acceptable repayment guarantee from
any scheduled commercial bank or DFI.

2.3 Target Market & Eligibility of Borrowers

PFIs will use the LoC to provide loans to microfinance borrowers including microenterprises and
for micro housing loans. Besides fresh loans (to new and existing customers), enhancements of the
existing loans will also be considered eligible for finance. The LoC will maintain gender dimension

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 with a target of allocating 60 percent of loans to women and women-owned microenterprises, to be
achieved at the end of the facility period.

2.4 Pricing & Recovery

The funds under the LoC will be available to PFIs on 6 months Kibor + spread as decided by Fund
Management Committee and reviewed from time to time. The pricing will be based on market-
based terms as noted above. For onward lending to end-customers, the PFIs should follow market
based pricing for end borrowers. The pricing policy of PFIs should be transparent and acceptable
to the Fund Management Committee. In terms of recovery from PFIs, the mark-up on utilized/
withdrawn funds will be charged on six monthly basis (‘Offer’ side on mark-up maturity dates).
PFIs would be required to pay mark-up upto July 15th and Jan 15th of every year for January to June
and July to December, respectively.

However, the principal amount will be recovered in one bullet payment at the maturity of limit.
The PFIs will also have an option to pay the principal in four quarterly installments at the maturity.
PFIs can partially or fully repay their loans before maturity.

3- UTILIZATION & MONITORING

3.1 Proper Utilization of the Fund

The loan shall not be used for the purpose other than defined in these guidelines. In this regard, the
PFI will ensure that strong internal controls are established. All, relevant, Federal and Provincial
Acts and SBP/SECP prudential regulations shall be strictly observed while utilizing the facility.

Moreover, the PFI will arrange annual internal audit of the facility and the report will be submitted
along with summary to the Fund Management Committee. Further, SBP inspection teams will
regularly inspect the LoC portfolio of MFBs for its intended usage and compliance of the terms
and conditions embodied in this circular as well as the finance agreement to be signed between
SBP and the PFI. To ensure appropriate usage and compliance of all the terms and conditions, the
NBFCs will have to arrange separate external audit of the LoC portfolio through audit firms on
approved list of SBP.

3.2 Monitoring & Reporting of the Fund

PFIs shall keep separate record of all loans extended under the LoC and submit a comprehensive
borrower-wise report on quarterly basis (or as and when required) and an E&S report on yearly
basis to Fund Management Committee defining sectors, geographic distribution and gender
coverage (Annexure-3) or any other variable as desired by the Fund Management Committee.
Wholesale NBFCs will assume responsibility of submitting above-mentioned reports from
respective MFBs and NBMFCs, in addition to consolidated reports of key variables (utilization,
targets etc.).

3.3 Contact Details

The contact details at SBP, for the purpose of allocation of limits, are as follows:
1. Director,
Agricultural Credit & Microfinance Department,
State Bank of Pakistan (Main Building),
I.I. Chundrigar Road,
Karachi.
Phone: (+92 21 99221579)
Fax: (+92 21 99221558)

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The contact details at SBP BSC for operational matters, i.e. limit disbursement, repayment, and
return submission etc., are as follows:
2. Director
Develop Finance Support Department
SBP BSC
I.I. Chundrigar Road,
Karachi.
Phone: (+92 21 99221990 )
Fax: (+92 21 99221101 )

*******************

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INTERPRETATIONS AND ABBREVIATIONS

AC&MFD Agricultural Credit and Microfinance Department

BP&RD Banking Policy and Regulations Department
CAR Capital Adequacy Ratio
(The ratio is currently 15% subject to review by SBP from time to time)
DFG Development Finance Group
DFSD Development Finance Support Department
E&S Environmental and Social Risk Management
EAD Economic Affairs Division
ED Executive Director
FIIP Financial Inclusion and Infrastructure Project
FIs Financial Institutions
HoD Head of Department
Kibor Karachi Inter-bank Offered Rate
LoC Line of Credit
MCR Minimum Capital Requirement
(for national level Microfinance banks the requirement is Rs. 1 billion while for
provincial level Microfinance banks it is Rs. 500 million)
MFBs Microfinance Banks licensed by SBP
Micro-Borrower The definition1 in the PRs as issued by SBP and amended from time to time would
be used.
Micro-Enterprise The definition2 in the PRs as issued by SBP and amended from time to time would
be used
Micro-Housing The definitions3 in the PRs as issued by SBP and amended from time to time would
Loans be used by the fund.
MoF Ministry of Finance
NBFCs Non-Bank Finance Companies licensed by SECP (particularly who are in the
business of wholesale and retail lending to microfinance sector).
NBMFCs Non-Banking Microfinance Companies licensed by SECP
PD Project Director
PFIs Participating Financial Institutions, which include MFBs, NBFCs and NBMFCs
PRs Prudential Regulations for microfinance as issued by SBP
SBP State Bank of Pakistan
WBP World Bank Project (The FIIP)

1
A poor person, with meager means of subsistence, involved in livelihood activity and has an ability to repay debt
from an annual income (net of business expenses) up to Rs. 500,000. Maximum loan size in general loan category
shall be Rs. 150,000.
2
Projects or businesses in trading, manufacturing, services, or agriculture that lead to livelihood improvement and
income generation. Moreover, these projects/ businesses are undertaken by micro entrepreneurs who are either self-
employed or employ few individuals not exceeding 10 persons excluding seasonal labor. Maximum loan size for this
category shall be Rs. 500,000.
3
This shall mean loans to poor persons with annual income (net of business expenses) up to Rs. 600,000. For the
purpose of this credit line, maximum loan size for this category shall be Rs. 500,000 without any portfolio restrictions .

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 Annexure-1
FINANCE RELEASE REQUEST FORM

The Chief Manager,

SBP BSC (Bank),
Karachi. Date:-------------

Dear Sir/ Madam,

Request for Release of Finance Amount

Under Approved Limit of Line of Credit (LoC)-FIIP

1- This is with reference to SBP letter No. ---------- dated-------------- regarding the allocation of limit to-
-------(the PFI) ------under the LoC. In this regard, we hereby submit our application for disbursement
of Rs. -------------- (Rupees. ------------------------------------------------ only).

2- We certify that the details of disbursements under FIIP will be recorded separately and the
comprehensive statement in this respect will be submitted on quarterly basis. Also, the records will be
made available to SBP team/ External Auditors during on-site inspection/ review.

3- We hereby submit/ have already submitted the Finance Agreement and the Demand Promissory Note
for the full amount of the limit allowed by SBP under the LoC conveyed through the abovementioned
letter (at Para 1 above).

4- We hereby commit to abide by the conditions set forth in the abovementioned letter and the Finance
Agreement and all the other instructions issued by SBP from time to time with regard to the LoC beside
all the other applicable regulations.

Yours faithfully,

---------------------------------- ----------------------------------

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 Annexure-2
FINANCE AGREEMENT

The Chief Manager,

SBP BSC (Bank),
Karachi.
Dear Sir,

This is in consideration of your agreeing to make available to us a Line of Credit (LoC) under Section 17
Subsection (19) & (19A) read with Section 22 of State Bank of Pakistan Act 1956, not exceeding Rs. -----
-------------------------(Rupees---------------------------------------------- only) under State Bank of Pakistan’s
Line of Credit of Financial Inclusion and Infrastructure Project through AC&MFD letter
No…………………dated…………………. against which we………………………………are delivering
to you a Demand Promissory Note made by us in your favor.

2. Now we do hereby agree to the terms and conditions as set out hereunder:
a. We shall pay/ repay the principal and mark-up amount of finance and any other charges thereon to
you in accordance with the agreed schedule of payment. In no case our liability to pay/ repay you
the principal amount of finance, or mark up or any other charges thereon shall be dependent upon
the recovery from the borrower nor shall our liability be affected by any default on part of the
borrower.
b. As security for the said finance we are delivering herewith a bill of exchange/ demand promissory
note of the assigned limit, and also on each occasion of enhancement (if any) we shall deliver to
you, bills of exchange/ demand promissory notes duly endorsed in your favor, as are acceptable to
you and drawn on and payable in Pakistan.
c. We undertake that we shall not extend finance in terms of this agreement unless we are satisfied
that all parties liable there under are financially sound and credit worthy. Further, the risk of default
will be borne by us.
d. We shall not sanction finances for any purpose other than those prescribed under the LoC rules,
this agreement and SBP E&S policy and corresponding procedures. We shall also obtain a
declaration from our customer to the effect that the funds or any part thereof should not be utilized
except for the purpose spelt out in the LoC rules and E&S guidelines. We shall also make
reasonable effort to verify the authenticity and applicability of such declaration by the customer
during tenure of the loan.
e. Further, we shall:
I. Use all reasonable efforts to ensure that environmental and social performance of sub-loans
is in compliance with the applicable environmental and social requirements, as follows, as
specified below, through adequate implementation of the bank’s ESMS:
(i) applicable environmental and social national and local laws and regulations
of Pakistan; and
(ii) List of Excluded Activities set forth in Appendix 1 of this Agreement,
II. Implement the mitigation and management measures specified in the bank’s E&S Action
Plan, where such plan is necessary
III. Provide an annual E&S reporting to SBP on format communicated by SBP within 90 days
after the end of each calendar year.
IV. Manage the working conditions of their workforce in accordance with relevant aspects of
the World Bank Performance Standard 2 on Labor and Working Conditions as described
in E&S policy.
V. Within three days of occurrence, PFIs will require their borrowers to notify them, and in
turn, will notify SBP of any social, labor, health and safety, security or environmental
incident, accident or circumstance having, or which could reasonably be expected to have,
any material impact on compliance with applicable E&S requirements.
VI. Maintain an easily accessible grievance redress mechanism acceptable to SBP to address
feedback and grievances relating to the bank’s investment activities.

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 f. We agree that notwithstanding anything contained elsewhere in this agreement, the amount of this
finance along with markup will become due and payable, if we commit breach of any of the terms
and conditions of this agreement.
g. Mark-up amount shall be payable by us to you on every half-year end i.e. June 30 and December
31, while payment of principal will be made in the last four quarters of the loan period on the
abovementioned dates or in bullet form. If any of these dates fall on holiday, the next working day
will be considered the due date for payment.
h. The loan amount along with mark-up can be prepaid at any time before maturity without any charge
or penalty.
i. SBP shall have a right to charge penal interest and penalties in any form in case any of the loan
covenants/rules e.g. disbursement of loans for any purpose other than those prescribed under the
LoC, mis-reporting etc. are not met by us in any form whatsoever.
j. SBP shall have access to financial records of the PFIs related to the LOC
k. For the purpose of markup calculation average daily balance of 360 days would be considered as a
year.
l. You are hereby authorized to collect penal markup and/ or penalties in any form and principal and
mark-up from our account/ the account of our guarantor institution with SBP BSC in case we fail
to make payments on due dates, without seeking debit authority from us/ the guarantor institution.
You shall also be entitled to charge fine on us, at a rate specified by SBP from time to time and
also retrospectively, on our failure to make payment whether on account of inadequate balance in
our account or otherwise.
m. You have our authority to debit all of our accounts now held or held hereafter or adjust any money
worth which may, howsoever, become due from you or come into your possession or control to the
extent of the amount due from us under any such promissory note or in terms of the clauses referred
herein before or otherwise under this agreement.
n. No indulgence or delay in exercising any of your rights hereunder shall be deemed a waiver of any
right and no waiver of any of your right hereunder shall be construed as a waiver of any other rights
you may have.

Yours faithfully,

Authorized Signatories (including guarantor institution)

Witnesses

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 DEMAND PROMISSORY NOTE
(TO BE SUBMITTED BY PFI)

Place:
Date:
Amount Rs.

On demand we ___(the PFI)______ promise to pay the State Bank of Pakistan, Banking Services
Corporation __________or order the sum of Rs.________________________ (Rupees
________________________________only) for value received plus markup @ ______% p.a. plus fines
and charges determined by State Bank of Pakistan for financing under the Line of Credit of Financial
Inclusion and Infrastructure Project.

(Authorized Signature of the PFI)

Name and Seal

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 Annexure-3

DETAILS OF FINANCING UNDER FIIP LINE OF CREDIT*

Particulars of Finance
Branch Type of
Bank/ Name/s of CNIC No. Gender
Sr. No. Name & District Business** Loan/ Loan Status DPD^
Institution Borrower/s 00000-0000000-0 M/T/F@ Date of
Place Product Date of Mark-up Collateral Date of
Disburse Amount
Sanction Rate # Settlement
ment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Regular
OAEM
Substandard
Doubtful
Loss
* to be submitted on 10th of the proceeding month for the previous Quarter. Charged-off
** for housing loans only "housing" should be mentioned.
# Clean lending should be specified clearly.
@ M: Male, T: Transgender, F: Female
^ Exact Status on the last day (30th or 31st) of the reporting quarter.