It is one of the most robust periods in the microfinance sector of Pakistan in terms of growth. It is growing at a rate of over 30% annually. There are more than 40 microfinance banks, both MFIs and MFBs, in Pakistan. The total outstanding loans of Pakistan’s microfinance sector are approximately Rs 50 billion whereas the total number of borrowers is approximately 2.8 million. Out of 40, there are 9 major microfinance banks. Non Performing Loans or Portfolio at Risk of microfinance sector is less than 5%. For FINCA, the non performing loans are less than 1%. Around 90% of the microfinance market is untapped so there is great potential for new entrants in the market. FINCA is the only microfinance bank in Pakistan with an entire loan
portfolio which comprises of enterprise and individual loans. They disburse loans without collaterals and based on a cash flow analysis of the borrower. This model has been successful all over the world in the microfinance sector. Mudassar Aqil, Chief Executive Officer of FINCA Microfinance Bank, speaks on Pakistan’s Microfinance sector.
Please give a brief introduction about your professional background?
My professional background includes 14 years of commercial banking experience. I worked for 8 years in the United States in two different commercial banks. Then, I joined Bank Al Falah in Pakistan and was with it for 5 years. Primarily, I worked in the commercial banking operations’ department followed by the marketing and human resource departments respectively.
Later, I joined Kashf Microfinance Bank in 2011 as a chief executive officer. In May 2013, FINCA Microfinance Bank acquired majority of shares of Kashf Bank. FINCA is a global organization of microfinance operating in 22 countries and 5 continents. Currently, it is a majority share holder in Kashf Bank, holding 84% of the shares, which is why the name of the bank has been changed to FINCA Microfinance Bank.
Although, I am working in the banking sector, I am an entrepreneur in spirit. I want to do things innovatively and find solutions to problems. I believe in reducing bureaucracy barriers and improving services.
Based on your experience, what are the differences in the banking sector of the United States and Pakistan?
Well, the US financial market is completely the opposite of Pakistan’s. In Pakistan, only 14% people have access to finance, whereas in America, over 80% of the people are users of financial services through banking. It has a very nominal growth market. We talk about growth in terms of basis points in America. It is a zero-sum game and one has to grow at the expense of another.
On the other hand, the banking sector in Pakistan is an exponentially growing market therefore the dynamics and perspectives are completely different. In Pakistan, we are growing at a rate of more than 60% since the last 2 years and projection for next year’s growth is 75%. It is an unexplored opportunity as out of a population of 180 million, only 14% have access to banks. The proportion of people who are either underserved or not served at all is 86%. There is significant potential to grow by working towards providing new and innovative solutions for your customers as this industry is all about how customer centric you are. According to reports, 66% of Pakistan’s population lives on less than $2 a day and 12 million children who should be, but are not, in primary schools. Therefore, if you do not bring solutions which are meaningful for the underpriviledged allowing them to become a part of the financial system of Pakistan, then you cannot grow as a country or as a nation. Microfinance has a huge market in Pakistan. It is just a matter of providing a solution and value proposition to the poor people.
What is the current situation of the microfinance sector of Pakistan?
Currently , it is one of the most robust periods in the microfinance sector of Pakistan in terms of growth. It is growing at a rate of over 30% annually. There are two kinds of organizations operating in Pakistan in the microfinance sector. These are Microfinance Institutions (MFIs) and Microfinance Banks (MFBs). MFB is a bank which is allowed to accept deposits and is monitored by the State Bank of Pakistan. There was a microfinance ordinance issued by the State Bank in 2001 under which we acquire licenses. In this way, a bank can generate its own liquidity from the market by accepting deposits. It is a self sustainable model, without relying on any external debt. FINCA is fully funded by our depositors and we are completely debt-free.
There are more than 40 microfinance banks, both MFIs and MFBs, in Pakistan. The total outstanding loans of Pakistan’s microfinance sector are approximately Rs 50 billion whereas the total number of borrowers is approximately 2.8 million. Out of 40, there are 9 major microfinance banks which are growing each year. Non Performing Loans or Portfolio at Risk of microfinance sector is less than 5%. For FINCA, the non performing loans are less than 1%.
Tell us about FINCA Bank operations and why was there a need for FINCA to acquire Kashf Bank?
FINCA was founded 30 years ago and currently has a very robust presence in developing countries. It is a unique organization as other banking organizations go wherever there is an opportunity; however, FINCA has a track record of establishing itself in places where there is a need of microfinance. FINCA’s vision is to help the world’s lowest-income entrepreneurs so they can create jobs, build assets and improve their standard of living.
When Kashf Microfinance Bank was established, the minimum capital requirement was Rs 500 million. Later, the State Bank of Pakistan increased the minimum capital requirement limit to Rs 1 billion. Therefore, there was a need to inject new capital. This was the reason why we needed a new shareholder who had the resources to provide capital and more importantly, shared the same mission and vision as Kashf Bank. FINCA was a perfect match. It had the resources, similar values and even a global track record of best practices. It was the largest foreign direct investment in the microfinance sector of Pakistan as FINCA is the largest global operator of microfinance in the country.
What changes, if any, have you made in the management after the acquisition?
When FINCA came to Pakistan, they believed that there was no need of changing the management as the country already had a strong human resource base. They were so pleased with the quality of management and human resource in Pakistan that they decided that no major changes were required. The only addition was a couple of international colleagues that joined us.
How does your banking help the poor? What can you tell us about your loans and the procedures of disbursement?
Out of the Rs 50 billion portfolio of the microfinance sector, around 66% which is two-thirds, is disbursed in group loans. Group loans are predominantly given in rural areas. A group of people apply for a loan and get an equal amount individually, and if one person defaults, then everyone is collectively responsible for it. It is also called social collateral. Most of these loans are bullet payment loans. ‘Bullet payment’ is a term which means that you collect the entire payment at the end of the term. The reason for this method of collection is that most of these loans are granted to agricultural people. They pay back the amount at the end of the crop season.
This model is not as successful in the urban markets as people do not trust each other and thus, they avoid opting for group loans. Also the loan amounts in urban areas are more significant which is why they cannot be given in groups. However, in urban markets, small enterprises require larger loans and are mostly reliable and sophisticated. Although globally it is old, most of the microfinance sector in Pakistan follows the same individual as well as the group model. That is why the average loan size here is only Rs 26000. Therefore, when you make the inflationary adjustments, it is not growing at a healthy pace.
The remaining one-third of the market comprises of individual loans. These loans are collected in monthly installments. Nearly half of these loans are backed by gold. Thus, you do not have to carry out an aggressive cash flow analysis of the borrower. The other half is purely an individual loan, without any collateral, which is given to small entrepreneurs who are running non-agricultural businesses. This comprises merely 18% of the total loan portfolio of the microfinance sector and thus needs to be increased. This can be done by increasing the average loan size.
FINCA is the only microfinance bank in Pakistan with an average loan size of Rs 65000 and its entire loan portfolio comprises of enterprise loans and individual loans. We do not engage in group lending. We disburse loans without collaterals and based on a cash flow analysis of the borrower. This model has been successful all over the world in the microfinance sector.
It is true, that with group lending, you give sustenance to people, their quality of life improves and some people are even able to get out of poverty. If you want to see exponential growth and sustainable results, then enterprise lending is the best option. According to research figures, each enterprise loan of Rs 50000 in Pakistan creates three new jobs. Therefore, when you lend to small enterprises, they are able to grow, resulting in job creation which is, beyond doubt, a major contributing factor in removing poverty.
The State Bank’s limit of loan size is Rs 250,000 whereas the market’s average loan size is Rs 26,000 only. We should increase the loan size and start giving bigger loans to the agricultural sector. The State Bank also allows giving loans to enterprises up to Rs 500,000 with a condition that such loans should not account for more than 40% of the portfolio of the bank.
Since the inception of the bank, we have disbursed loans worth of Rs 7 billion , among 20,000 people. However , we are planning to grow the number now as we have the capital. Our main competitive advantage remains that we give enterprise loans on an individual basis, based on cash flow analysis.
Elaborating on the disbursement procedure, our sales force goes all out to market our products. We disburse the loan within 3 to 5 working days and that is the fastest in the sector. We visit the business or household and, with due diligence, check the reputation of the borrower. We also carry out a thorough cash flow analysis, based on which we determine the repayment capacity of the borrower.
There are three main principles of lending :
- The repayment capacity of borrower
- Ensuring that the loan is consumed for same purpose which the borrower had mentioned
- The overall general reputation of the borrower
Taking these principles into consideration, your loan has a poor chance of becoming a bad debt unless in the case of an unavoidable, external factor like floods, earthquakes etc. A golden rule of lending is that you can never rely on collaterals for lending. Collaterals only provide the bank with confidence, nothing more.
Poor individuals do not have collaterals like gold or other precious items. Instead, they have aspirations, ambitions and skills.
How much work force do you have?
We have around 800 employees and more than half of them are working on full time or part time basis.
Kindly tell us about your interest rates?
In Pakistan, the State Bank does not control the interest rates. It is a free market for loan products. The interest rates are set by analyzing the competitive forces of supply and demand, and the cost of doing business. Our rate is quiet competitive and is around 24% to 30% annually, based on the product. If you compare this with credit card loans, they charge a rate of around 40% annually.
Since we make smaller loans and our cost of doing business and managing these loans is generally high, that is why we have to charge a rate which is slightly higher than commercial banks. There is a misconception that low income entrepreneurs cannot afford this loan. However, there is a study carried out by the Pakistan microfinance network which concluded that the return on asset for microfinance borrowers was around 80% to 200%. The actual problem in Pakistan is the access to finance; not the cost of obtaining it. We also teach our borrowers about savings and managing their finances effectively.
Can you tell us something about your banking operations?
We are a regular bank, open for all. Anyone can open a bank account with us. All of our branches are online . We are part of the one-link ATM network. We are also introducing internet banking this year. Therefore, any customer can open an account and deposit in the FINCA bank.
How do you see the State Bank of Pakistan as a regulator?
For the last 5 years, the State Bank of Pakistan has been ranked one of the top three microfinance regulators in the world. This is one of the reasons why FINCA decided to come to Pakistan due to the excellent regulatory banking environment. I think State Bank has a tremendous vision and great professional people working. Now it is up to the microfinance practitioners and banks to derive benefits from this regulatory environment.
What potential do you see for the new players in the microfinance sector?
Around 90% of the microfinance market is untapped so there is great potential for new entrants in the market. According to a State Bank report, potential microfinance borrowers in Pakistan are around 28 million whereas the existing, actual borrowers are a mere 2.8 million.
What are your future plans for FINCA?
We are working to expand our network and would like to explore new avanues. We also want to start working in the agricultural market of Pakistan and are currently working on devising innovative ideas for agricultural lending. We are also aiming to achieve a higher tier for enterprise lending where we can lend larger amounts.
What advice would you like to give to small entrepreneurs who wish to start a business?
There is a commonly prevalent paradigm amongst people that starting a business requires heavy financing and unless they have that money, the business cannot be initiated. In most world economies , a person who has no past experiences of business is highly unlikely to get funding from anywhere. Entrepreneurs need to develop a plan, no matter how insignificant it may appear to be. You always start small. Try to make your business sustainable and attempt to develop a good value. Once the value is created, you will find it easier to find funding. If you can survive the first few years of business, then it will be much easier.