A call for diversity in lending procedures

In Pakistan and other South Asian regions, microfinance has a long tradition, as symbolized by Nobel Peace laureate Muhammad Yunus and his Grameen Bank. Akhtar noted that when talking about microfinance, the first thing to bear in mind is that "it is very different from other forms of lending", such as loans involving small and medium-sized enterprises and large corporations.

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"Microfinance is special in the sense that you are dealing with very small businesses, that you are not only trying to meet entrepreneurs' needs but also credit demand for purposes such as education, children, weddings, health and consumer demand," Akhtar said.

She also said "microfinance" has different meanings. The definition that's emerging is one of what some people call "financial inclusion", which means "you have to develop an inclusive financial system where the microtransaction is looking after the multiple needs of individuals. It should be a holistic service provider."

Financial inclusion means special institutions have to be developed to deliver microloans. In Pakistan's case, more than 10 special licenses have been granted to microfinance banks. These private banks have lower capital requirements than banks and are supervised by the central bank.

Akhtar said that not all governments want to follow such a system because the supervision of these banks requires competent regulators. Central banks have to appoint special supervisors and train them, which is costly. But Pakistan has found that it is worthwhile to do so.

In China, banks' preference for profits above serving the real economy has supported the growth of shadow banking. A deputy central bank governor in China recently warned that shadow banking threatens to undermine the nation's financial system and called for tougher rules to control an industry that's driven up borrowing costs and done little to support the economy or productivity.

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