The State Bank of Pakistan (SBP) has announced a significant revision in the minimum paid-up capital requirements for microfinance banks (MFBs), increasing the threshold from Rs. 1 billion to Rs. 2 billion in a phased approach. This move is part of SBP’s updated Prudent Regulations for Microfinance Banks aimed at bolstering the financial resilience and operational sustainability of these institutions.
According to the revised guidelines, microfinance banks operating at the national level must raise their paid-up capital from the current Rs. 1 billion to Rs. 1.5 billion by June 2026 and further to Rs. 2 billion by June 2027. Meanwhile, provincial-level MFBs are required to increase their paid-up capital from Rs. 500 million to Rs. 1.5 billion by the mid-2026 deadline and reach Rs. 2 billion by the end of 2027. This phased increase reflects SBP’s commitment to ensure that MFBs maintain sufficient capital buffers to absorb financial shocks and support growth.
The microfinance sector in Pakistan currently comprises 12 banks, many of which have struggled with profitability since 2021. The economic aftershocks of the Covid-19 pandemic and the devastating floods have heavily impacted small businesses — the primary clientele of MFBs — leading to a rise in loan defaults and pressure on the banks’ balance sheets. By revising capital requirements upward, SBP aims to strengthen the overall sector’s financial health and safeguard depositor interests.
Alongside the capital increase, SBP maintains a minimum Capital Adequacy Ratio (CAR) of 15 percent of risk-weighted assets for microfinance banks. This ratio is a critical indicator of a bank’s ability to manage risks and absorb losses, ensuring MFBs operate on a solid financial footing.
The regulations further require microfinance banks to create a reserve fund credited with at least 20 percent of their annual post-tax profits until this reserve equals the paid-up capital. This mechanism enhances the banks’ ability to cover unexpected losses without eroding core capital. Additionally, contingent liabilities for MFBs are capped at three times equity during the first three years of operation, increasing to a maximum of five times equity thereafter, providing further risk containment.
SBP also outlined penalties related to compliance with Cash Reserve Requirement (CRR) regulations. If an MFB fails to maintain the average CRR balance, currently set at 3 percent of liabilities subject to CRR, during the reserve maintenance period, it will be liable for penalties calculated on the shortfall amount. Similarly, daily minimum balance requirements, currently at 2 percent, are strictly enforced with penalties for non-compliance. The penalty rate is one percent per day on the shortfall and is reported through SBP’s designated financial reporting channels.
The tightening of regulations reflects SBP’s ongoing efforts to modernize and stabilize Pakistan’s microfinance banking sector, which plays a crucial role in financial inclusion by providing credit and financial services to underserved segments of the population. With these enhanced capital and operational requirements, microfinance banks will be better positioned to support small enterprises, rural economies, and promote sustainable development.
Looking ahead, the revised regulatory framework is expected to drive stronger governance, improved risk management, and greater investor confidence in the microfinance sector, ultimately contributing to Pakistan’s broader economic growth and financial ecosystem development.