Jahanzeb Khan possesses 23 years of global and local experience in fintech, financial services and banking. He is a renowned, leading expert in transforming and emerging financial service solutions. He joined FINCA Microfinance Bank Limited as CEO in June earlier this year. Khan has previously worked at Deloitte Consulting (Senior Consultant - Financial Services), JPMorgan Chase & Co (Executive Director, Consumer & Community Banking - Digital Emerging Payments), and Telenor Microfinance Bank/Easypaisa (Group Executive Director-Chief Product Officer/Strategy and Transformation). He has a BS in Electrical Engineering from University of Texas at Austin, and an MBA from the University of Delaware, besides attending programs at Wharton (University of Pennsylvania) and Harvard Business School.

Below are selected excerpts from BR Research’s recent conversation with the FINCA CEO on the outlook of the local microfinance sector during the pandemic:

BR Research: The addressable market of microfinance borrowers, as per Pakistan Microfinance Network (2019 study), is about 40.9 million micro clients and 5.8 million micro enterprises. As of March 2021, the number of active microfinance borrowers stood at ~8 million. In your view, how can this wide gap in microfinance coverage be bridged without compromising on financial soundness of the sector?

Jahanzeb Khan: There are a few things that are critical to bridge this gap. First of all, the industry needs to have a perspective on the unmet needs of the under-served or un-served microfinance consumers and then find responsible and sustainable ways to fulfill those needs. Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services. People are likely to use these offerings to expand businesses, invest in education or health, manage risk, and weather financial shocks that can improve the overall quality of their lives.

It is a fragmented space that we operate in, and we have to adhere to responsible lending principles. Customers are scattered across urban, peri-urban and rural geographies. In a traditional context, servicing those customers requires ‘last mile’ physical presence. Given the fact that micro-borrowers tend to have little or no documentation, it takes physical visits, observation, reputation check, and a fair amount of judgment to make a credit call. On top of it, the average loan size for the industry is less than PKR 50,000. Therefore, it becomes a harder, more complex and more capital-intensive process to overcome the hurdles related to financial and digital literacy. And the challenge is not only to educate the potential microfinance customers on the criticality of being financially empowered, but also to graduate these users into leveraging the products.

There is also the challenge of lack of available information on micro enterprises which lack digital fingerprints – like how much the inventory turnaround is, how much the cash flows are, and what the selling patterns are. Digitization of such information can catalyze lending – several pilots are already underway that are focused on utilizing such information for credit analysis. Over time, digitization can go a long way in helping enhance microfinance outreach. But I believe the right combination of ‘touch’ and ‘tech’ needs to be achieved for the overall delivery model in the short term.

BRR: During the pandemic, the number of borrowers, as per PMN data, had remained almost flat at 7.6 million as of March 2021 (4% growth since March 2020), whereas the number of savers had jumped to 67 million (37% growth since March 2020). Why do you think there was this huge mismatch between growth in borrowers and savers?

JK: Overall at the industry level, it is good to see that the number of active borrowers is recovering after seeing a dip last year. The number of savers has gone through the roof, because of digitization and the uptake of mobile wallets. The Covid-19 has indirectly helped increase digital adoption, especially in the cities and among those who have access to smartphones. Lending and payment behavior of borrowers is also impacted due to recurring Covid-19 fallout and uncertainties, coupled with higher inflation. Customers are keeping their cash close to themselves for an emergency. This is true more for rural areas.

BRR: More than a year after the pandemic set off, in what ways have Pakistan’s microfinance borrowers been affected?

JK: There is no doubt that the pandemic has had disproportionate impact on the vulnerable section of the society. As per the survey conducted by Pakistan Bureau of Statistics, around 20.6 million people lost their jobs during the lockdown imposed in Apr-June 2020 and almost 40 percent households faced moderate to severe food insecurity in the aftermath of the pandemic.

Our industry is the one that is servicing the segment which is hit the hardest. A Pakistan Microfinance Network survey on the impact of the Covid-19 outbreak on borrowers in May 2020 had shown that businesses of 82 percent of the respondents were negatively affected. It is good to see that the government has moved from complete lockdowns to smart lockdowns, which are much better for businesses than what had been done in the past. The businesses continue to be affected due to off days and reduced hours.

Outside of the pandemic, our customers have also been facing the macroeconomic impact of rising inflation. This affects micro borrowers’ cash flows and hence their ability to repay the loans. We can see the trends in reduced collection rates for customers impacted. On an elongated basis, where small businesses have been shut down due to the lockdowns, those customers have been, over time, unable to pay back their loans.

BRR: How has the pandemic affected the lending appetite of the microfinance service providers?

JK: The microfinance industry is a cyclical industry. We will see the impact of what has happened to the customers in a lagged way. Customers have gone through a very tough year overall, and now I foresee the microfinance banking segment could go through a tough time. We helped provide relief to our customers in rescheduling and deferring loans as per the SBP regulations. But the customers, due to the Covid-19 impact and uncertainties ahead, are keeping whatever cash they have generated close to themselves. Even in sectors that have not been affected much, customers are apprehensive to invest in their business due to uncertainty created with continued waves of pandemic.

BRR: Is there fresh credit demand?

JK: The credit demand is certainly there. From an industry perspective, there are certain sectors that microfinance banks are focused on, and they are continuing to lend in those spaces. These include business-to-business segments among micro enterprises, which the industry is trying to penetrate. There is also growth in products like Equal-Monthly-Installment. But then microfinance banks are being cautious at this time in lending to sectors that are showing poor results.

BRR: From a lender’s perspective, what sectors have been hard-hit by the pandemic and which ones have done better during the turmoil?

JK: The negative impact of COVID-19 on businesses was observed without exception, however, the concentration of the impact remained varied across sectors, sub-sectors, business types and firm size. As per a UNIDO survey, manufacturing lost revenue anywhere between 30 percent and 50 percent and services lost between 50 percent and 70 percent in revenues compared to previous years.

The pandemic impacted the sectors unequally. From the microfinance perspective, least-affected sectors were those that were allowed to operate during the lockdown. These included convenience stores, food outlets, medical stores, milk shops, tandoor shops and other entities offering essential services.

However, educational institutes, travel agencies and beauty salons/barber shops faced severe challenges to sustain their operations.

Credit behavior in agriculture sector is also impacted, but this sector has some history to it outside the pandemic, due to the impact of crop losses and locust attacks. Microfinance banks are witnessing less-than-optimal repayment behavior of agriculture-based borrowers.

BRR: Independent surveys have shown that a majority of microfinance borrowers were not aware of the regulatory (SBP/SECP) directives concerning loan payments deferral / loan rescheduling. Why do you think this vital information did not reach the borrowers when it needed to?

JK: Overall, microfinance banks tried their best to reschedule and defer loans. Due to low financial literacy, we are observing lack of understanding in many borrowers around financial terms like loan rescheduling or deferral. Perhaps, the users did not comprehend what those schemes actually tried to achieve, and the results could be seen now in payment behavior of the borrowers.

The repayment behavior of customers that availed those facilities is somehow lower than customers in the normal portfolio. What that tells me is that either the customers’ perception or education of that facility was not that clear, or they have been impacted so much that they have been unable to stand up on their feet. That is the behavior that we need to get to the bottom of, and this creates the need to work with the policymakers to find a common ground to help ease the pressure on the microfinance banks as well as impacted consumers.

BRR: Having recently joined FINCA Microfinance Bank Limited, what are your priorities?

JK: I am extremely enthusiastic about helping people who have been ignored in the past, and FINCA is an organisation that is focused on social impact. The organisation has sizable operations, especially in rural areas. FINCA has more than 250,000 borrowers in Pakistan, with a lending book of over Rs21 billion. Total deposit base is more than Rs25 billion, with over 1.5 million savers. Besides social impact, this organisation also reflects our focus on women empowerment and diversity.

My top-most priority at FINCA is to follow responsible lending guidelines and help meet the financial needs of micro businesses. Besides, I will aim to prioritize providing superior customer experience to meet our customers’ financial needs with respect and dignity.

BRR: How has the FINCA mobile money platform fared during the pandemic?

JK: We are seeing similar trends as the industry overall. By the end of 2020, the customer portfolio crossed 580,000 mobile wallets, while the daily deposit also showed substantial growth. Business transactions worth more than Rs113.1 billion since launch have been transacted. In December 2020, another significant milestone was achieved with corporate payments worth more than Rs1 billion being disbursed.

We will continue to invest in this digital channel over time. We will be launching the FINCA Wallet in the near future. Besides this channel, we are also focused on internal automation and digitization so that we can achieve lower turnaround times for our customers and to provide them various channels to meet their needs. Compared to other microfinance banks, the leverage that we have is that the FINCA family is present in nineteen other locations around the globe, so we are uniquely positioned to learn from global insights and make a difference in Pakistan.