The State Bank of Pakistan (SBP) has taken a landmark decision to revise the Minimum Capital Requirement (MCR) or paid-up capital of Microfinance Banks (MFBs), doubling the threshold from Rs. 1 billion to Rs. 2 billion in a phased manner.
This move is part of the revised Prudential Regulations aiming to strengthen the microfinance sector’s stability, resilience, and ability to withstand economic shocks.
Revised Paid-Up Capital Requirements for National-Level Microfinance Banks
The SBP’s updated policy mandates that national-level MFBs increase their paid-up capital in two crucial stages:
- By June 30, 2026: Minimum paid-up capital must rise from Rs. 1 billion to Rs. 1.5 billion.
- By June 30, 2027: It must further increase to Rs. 2 billion.
This step-by-step implementation ensures a smooth transition, allowing microfinance institutions to gradually align their operations with regulatory expectations while mitigating liquidity pressures.
- Current requirement: Rs. 500 million
- By June 2026: Increased to Rs. 1.5 billion
- By June 2027: Elevated to Rs. 2 billion
This revision eliminates the capital disparity between national and provincial banks, encouraging uniform operational capability and risk tolerance across the board.
All existing MFBs, regardless of whether they operate on a national or provincial level, are required to increase their paid-up capital to Rs. 2 billion, net of losses, by June 2027.
This decisive policy ensures financial soundness and capital adequacy, directly addressing vulnerabilities observed in the sector over recent years.
Enforcement of Capital Adequacy Ratio (CAR)
To enhance the financial safety net, the SBP has reinforced the Capital Adequacy Ratio (CAR):
- MFBs must maintain a CAR of at least 15% of their risk-weighted assets.
- This ratio is crucial in safeguarding the solvency of MFBs against unforeseen losses and risky loan portfolios.
Maintaining a strong CAR positions MFBs to remain resilient amid economic disruptions and support their financial inclusion mission effectively.
There are currently 12 microfinance banks operating in Pakistan. Many have suffered financial setbacks since 2021, largely due to:
- The COVID-19 pandemic
- Catastrophic floods
- Reduced loan recoveries
- Mounting non-performing loans (NPLs)
These challenges directly impacted the sector’s profitability, pushing several institutions into prolonged losses and threatening their operational sustainability.
- A minimum of 20% of the MFB’s annual post-tax profits must be credited to the reserve fund each year.
- This obligation continues until the reserve fund equals the paid-up capital.
- For the first three years, liabilities must not exceed 3 times the equity.
- After three years, liabilities must remain within 5 times the equity.
Penalties for Failure to Maintain Required Reserves
The SBP has laid out a clear penalty framework for non-compliance with reserve maintenance requirements. The formula for calculating the minimum reserve balance is.
If an MFB fails to maintain the aggregate balance required over the reserve maintenance period:
- A penalty will be levied on the shortfall.
- This approach ensures accountability and compliance enforcement.
Even if the average reserve is maintained, any MFB that fails to maintain the daily minimum balance (currently 2%) will also be subject to penalties:
- The bank is liable to a daily penalty of 1% on the shortfall amount.
- The penalty will be based on official reports via the Reporting Chart of Accounts (RCOA) and returns to SBP.
These stringent measures reflect SBP’s zero-tolerance stance on operational deficiencies in financial management and its mission to stabilize the microfinance landscape.
- Promote financial discipline
- Attract more investor confidence
- Enhance public trust in MFBs
- Foster a more resilient microfinance infrastructure
