The microfinance sector is abuzz with news of divestment of a 79.2 percent shareholding of Khushhali Bank Limited (KBL).
The largest microfinance bank of Pakistan in terms of asset-base, KBL was established in 2000 as a part of the government's Poverty Reduction Strategy, with 15 commercial banks contributing capital worth Rs1.7 billion as an initiative by the SBP for the development of the microfinance sector in Pakistan.
KBL has the greatest outreach amongst all microfinance banks in the country, and fares better than other MFBs as far as efficiency, profitability and risk profile are concerned (see table).
However, funding for MFBs in Pakistan -, traditionally supported by donors - is fast becoming a challenge. With particular reference to KBL, the SBP in its report 'Strategic Framework for Sustainable Microfinance in Pakistan', published earlier this year said, "The largest MFB, Khushhali Bank, has been funded by the GoP-ADB sponsored subsidized financing. This source of funding has now dried up."
Consequently, with the phasing out of grants, the SBP wishes the bank to operate without relying on external sources of funding and develop a commercially and financially feasible business model.
"It is a transitionary step for KBL to develop as a sustainable bank running on a commercial level. In order to achieve that vision, a strategic investor with a vision needs to take over rather than a consortium of 15 banks that provided initial equity for the bank without any singular strategic vision," a source close to the deal told BR Research on condition of anonymity.
Besides, as the SBP highlighted, "In the initial phase of portfolio growth of MFBs, the equity/paid-up capital behaved as a temporary source of funding. Equity, however, cannot act as a major contributor to medium-to-long-term loan portfolio growth."
Wondering who could be the favourite buyer? The past gives an idea to some extent. In November 2008, Telenor Pakistan acquired a 51 percent stake in Tameer Microfinance Bank, and therefore, unsurprisingly, voices in the industry seem to look telecomm companies as possible prospective buyers.
"The structure of Telcos offers a good model for achieving SBP's vision of making KBL a financially sustainable MFB. They have different lines of businesses, which will come handy in developing various streams of revenues from various income sources," said the source close to this deal.
Yet, as Ghazanfar Azzam, CEO Kashf Microfinance Bank said, "There's a catch in that telcos will have less emphasis on the core microfinance business and its true purpose, since they might have streams of m-banking such as fund transfer and remittances in their agenda. But synergies can be driven, especially considering the large network of telco operators in the country."
As for the likely telco companies to be interested in the deal, a few names can be shortlisted. With Telenor out of the equation, there remain four likely contestants from the telecomm sector - Ufone, Mobilink, Warid, Zong.
With Bank Alfalah's stake in Warid telecomm, there seems less possibility for Warid to be a likely buyer. Amongst the rest, Zong's subscription base is less than half of either Ufone and Mobilink, reducing its odds to some extent.
Vis-à-vis Ufone and Mobilink, a report by AKD Securities Limited, published last Friday, mentioned that the sponsors of Mobilink (Orascom) had been in the running to acquire the Pakistan operations of RBS Bank, before the deal was clinched by Faysal Bank. This hints at a strong possibility of the telco giant's interest.
Interestingly, both Mobilink and Ufone have initiated m-banking services in collaboration with MCB and HBL respectively, both banks having shares of 17.6 percent in KBL.
While MCB is a part of the selling consortium, HBL is not divesting its shares, probably in line with the bank's vision of financial inclusion, as highlighted by Sultan Allana, Chairman HBL, in his previous interview with BR Research.
And that raises another possibility for big commercial banks as prospective buyers, especially considering their expertise in financially feasible banking. With the sponsors of HBL - Aga Khan Fund for Economic Development (AKFED) - having a stake of over 30 percent in the First Microfinance Bank, Pakistan, it has also been cited by industry players as one of the favourites.
Despite that, the ball seems to be more in the telecomm companies' court. But then, who knows, a consortium between a telco and a commercial bank may hitch the deal. The exact details will churn out as the deal takes shape.
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MICROFINANCE BANKS: KBL VS INDUSTRY
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KBL Industry
aggregate
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Number of active loans 329,421 626,220
Adjusted ROA -2.5% -5.9%
Adjusted ROE -8.40% -19%
Portfolio at risk (PAR) to GLP (> 30 days) 0.70% 1%
Adjusted operating expense to GLP 29.3% 33.4%
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Legend
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"GLP: Gross loan portfolio Adjusted ROA: shows the profitability
of the microfinance institution after discounting possible
grants and subsidies from government and donors"
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Source: Pakistan Microfinance Review 2009
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