Mudassar Aqil currently works as the CEO of FINCA Microfinance Bank. Previously he has worked for a large commercial bank in the US for eight years. After moving back to Pakistan, Aqil worked with Bank Alfalah for six years. Later the fact that 86 percent of Pakistani population is under-banked motivated him to move into microfinance, which is why he took on the opportunity as a chance to make a contribution towards financial inclusion in Pakistan.
In this interview with BR Research Aqil talks about the bank's history, its current structure and its plans. Below are its edited transcripts.
BR Research: Can you tell us about the history or the idea behind FINCA's establishment?
Mudassar Aqil: FINCA was founded by John Hatch and Rupert Scofield while they were working in Latin America. It started off as a scheme to provide credit financing for poor farmers in Bolivia on affordable credit terms, giving them the power to collect, disburse and invest capital as they saw fit. At the time, Grameen Bank had not yet been set up by Professor Younis and, as such, there was little formal conceptual understanding and recognition microfinance in much of the world. This experiment, which came to be known as "Village Banking", is how FINCA was born.
Today, FINCA has presence in 23 countries across five continents. We have offices in key developing countries, such as Afghanistan, Jordan, Azerbaijan, Kyrgyzstan, Georgia, Uganda, Zambia, Malawi, Guatemala, Haiti, and Mexico. We are one of the largest global microfinance operators, as well as one of the most well-respected microfinance brands in the world.
What is unique about FINCA is that we as an organisation not only invest in microfinance institutions, but also take a hands-on approach to research and transfer of knowledge and best practices across our 23 subsidiaries. Our presence across five continents coupled with the resulting scale that we have attained, allows FINCA to tap into more funding resources, and to realise synergies that come from running a global operation. This truly is a remarkable achievement in microfinance and positions FINCA to have a much larger impact on poverty reduction and the economic uplift of low income entrepreneurs globally.
BRR: When did it start in Pakistan?
MA: FINCA officially started in Pakistan in May 2013 when the organisation became the majority shareholder (82.8%) in KASHF Microfinance Bank. In November last year, we changed our name from Kashf Microfinance Bank to FINCA Microfinance Bank Ltd. The bank is growing rapidly; we are already in 70 plus cities across Pakistan and aim to be in 100 cities by the end of the year.
FINCA International has been greatly impressed by the quality of human resource in Pakistan and feels that people from here can easily go and serve in other subsidiaries of FINCA across the globe.
BRR: Many microfinance banks depend on seed money and long-term deposits as opposed to commercial orientation. Is FINCA Microfinance Bank working in this model?
MA: FINCA Microfinance Bank's mission is to serve the lowest-income entrepreneurs in the world, so that they can create assets, build new employment for other people and improve their lifestyles. The vision is to do this based on commercial principles, so as to stay sustainable. Anything that is built on the charity funding premise won't be sustainable in the long-term.
There are two types of models. The first is typically non-profit called MFIs (microfinance institutions)--these are not banks, so their inherent problem is funding: they will either borrow or take grant. The second model follows that of commercial banks and financial institutions. Having a banking license allows one to accept deposits and one can then compete in the market on commercial grounds against other deposit-taking institution. We are fully-funded through our depositors and don't have a need to borrow money to make loans.
BRR: What is your book size?
MA: Our book size is Rs 2.9 billion in deposits and Rs 2.3 billion in loans.
BRR: So what does the portfolio of Rs 2.9 billion constitute of?
MA: About 85 percent are individuals, as we have very little institutional deposits.
BRR: How many individuals are there in this deposit portfolio?
MA: We have around 200,000 deposit accounts. It's a large deposit base. From the technology stand point, we use the most robust banking software; probably the best in the banking industry. Our entire banking network of over 76 outlets is connected through a real-time online system, providing convenience of service to all our customers across Pakistan, just as with any other commercial bank. Our services include ATM cards, cheque books and real time SMS alerts for every transaction--these SMS alerts are sent in either English or in Urdu depending on the customer's profile. We offer a diverse array of products, each of them tailored to facilitate the financial needs of our customers; our product range includes term deposits, regular savings and current accounts. Recently, we also finalised the workings for an InterBank Funds Transfer facility, which we hope to introduce to our customers very soon.
BRR: How is the profitability situation looking like?
MA: Around 90% of the microfinance market is untapped, so there is great potential for growth in the sector, both now and in coming years. According to a State Bank report, potential microfinance borrowers in Pakistan are around 28 million--compared to existing, actual borrowers of a mere 2.8 million. In terms of growth, Pakistan's microfinance sector is currently seeing one of the most robust periods in history, with a growth rate of over 30% annually. As I mentioned earlier, FINCA Microfinance Bank is fully funded through our own deposits and we are completely debt-free. Just for perspective, 'non-performing loans' or the 'portfolio at risk'--what we in microfinance call PAR--for the microfinance sector as a whole in Pakistan is less than 5%; for FINCA Microfinance Bank, 'non-performing loans' stand at less than 1%.
BRR: When FINCA had acquired Kashf, what was its deposit base?
MA: After the acquisition, our loan book grew by around 60 percent and our deposit book grew by 58 percent.
BRR: Was that due to FINCA's name or just organic growth happening at the same time?
MA: The rebranding from KMBL to FINCA Microfinance Bank Ltd took place in November 2013; I feel the real impact from this activity will be seen in 2014. As mentioned earlier, around 86% of the population of Pakistan does not have access to banking; at the same time, these are incredibly robust times for the growth of microfinance in Pakistan. Since the official launch of FINCA Microfinance Bank in Pakistan last year, we have opened 17 outlets in different cities across Pakistan, resulting in 76 outlets across 68 cities in the country.
BRR: How much did FINCA inject?
MA: The total investment is Rs 824 million, which is amongst the highest in the microfinance sector in recent times.
BRR: How are you utilising the excess liquidity of roughly Rs 1 billion?
MA: Over 70% of our deposits are used to give loans to low income entrepreneurs. Excess liquidity is required for prudent risk management and is invested in T-bills and other high rating commercial banks.
BRR: Your ADR is 60-70%. Do you want to maintain at this or increase?
MA: We could increase it, or decide to be conservative. I think ADR will be optimal in mid-70 percents.
BRR: Are you facing the issues of bad debts & toxic assets?
MA: Our 30-day PAR--that is, as I mentioned, 'portfolio at risk' or payment past due by 30 days or more--is less than 1%. This is among the best in the country's microfinance sector right now.
BRR: Why is it working well?
MA: Low-income entrepreneurs are hard working people who are not out to defraud banks. Having said it is important to do proper due diligence. I am a commercial banker by training. And I have learned that fundamentals of banking are the same everywhere. One just needs to do a few things right. First, check the borrower's repayment capacity. Second, confirm that the loan is actually being used for the stated purposes, so it won't go bad. And third, investigate--insofar as possible--the character of the borrower. If all is in check, the debt will go only bad when there is some unforeseen event or crisis, such as sickness or family emergency. But, if all the above three points remain intact then there will be very small likelihood of bad debts. The problem, in my humble opinion, is over-reliance on collateral, which is one of the reasons why you see such bad loan performance in commercial banks. Collateral is never a surety for loan repayments. Prudent credit risk evaluation is the key.
BRR: But generally, micro finance banks have better checks and balances.
MA: It's not like that everywhere. As I mentioned earlier, according to the SBP, the potential market for microfinance in Pakistan is around 28 million borrowers. Right now only 2.8 million are being catered to--that's a mere 10% of the official potential. Almost 80 percent of microfinance loans have been provided on the basis of group lending, so there is a cross guarantee and social collateral. The average ticket size of a microfinance sector loan is Rs 26,000. Majority of these loans are 'bullet payment loans'; the interest and principal is paid in lump sum at the end of the term of loan. This model is successful to serve the bottom of the pyramid but not for the entire spectrum of microfinance. The second issue arises when we examine the ticket price 10 years ago--which was Rs 10,000--and we adjust for inflation. We now see that we are actually giving people less money than what we were giving back then. The institutions have not developed the capacity to give people the amount of money they actually need. There is a need, and the market segment is already there. The providers don't have the capacity to do credit analysis, manage the credit, or to create a service infrastructure on an individual basis. Group lending has its limitations especially in the urban centers where it is difficult for people to give cross guarantees. FINCA Microfinance Bank specialises in giving individual loan based on cash flow analysis.
Predominantly, in Pakistan microfinance has spread more so in the rural areas because urban markets require individual loans and microfinance providers except a handful including FINCA have not been able to provide innovative solutions to cater to them; hence the need for innovation.
At FINCA, our average ticket size is Rs 71,000. Our entire portfolio of 45,000 borrowers consists of individual customers. If we analyse our portfolio, around 90 percent of the same is concentrated in the monthly instalments tier, whereas the remaining 10 percent is in bullet payments. We started in urban markets, rather than rural areas and have trained our staff to do cash flow and credit analyses on potential customer who actually makes Rs 10,000, Rs 20,000, or Rs 30,000 a month. That is the secret to success. We disburse money within three days of the application. It is the fastest, hands down, in the industry. Our process is based on pure analysis, it is very objective, and we give rigorous periodic training on financial literacy and customer service to our staff.
We meet the global microfinance standard, which is known as SMART--if you protect your client; it protects the sector in return. Historically, majority of crises in the microfinance sector arose due to abuse of the client base. Some organisations charge excessive interest rates to clients, follow abusive collection practices, and resort to deception. We were given high marks in SMART assessment because of the tremendous amount of effort we have invested in training and putting in place processes and controls. You could say we established a solid foundation due to which we are rapidly expanding. Admittedly, this took a while. Now we have liquidity, capital, and a robust mechanism of serving clients. And we have a model and a product that can actually meet the needs of borrowers.
BRR: How are the deposits collected?
MA: For a regular depositor we are identical to any commercial bank. For borrowing customers also a deposit account is opened so they can use the account to pay their monthly repayments. The outlets are planned and opened within the reach of our customers, keeping their convenience in mind. The repayments can be done either by visiting our branches. Our deposit rates are very competitive in the industry; and we offer a wide range of deposit products, from Committee Accounts to Fixed Term Deposits. These products are tailored in a way to suit the financial needs of people from all walks of life. We offer tier-based savings accounts, where our customers can avail profits on their investments as per their saving capacity.
BRR: What are the costs of funds? What rate do you charge for your loans?
MA: Our cost of funds is around 10 percent. The mark-up on loans starts as high as 30 percent and as low as 24 percent. Returning clients get discounts on their loans. Our customers feel satisfied with us because we have the simplest processing of loans and other paper work. As I said before, we process loans within three working days, and our staff is very warm and welcoming in dealing with customers. These are just some of the reasons why our customers remain with us for years and why we are growing so aggressively.
BRR: Do you have other revenue streams?
MA: We are evaluating several options of providing valuable services to our clients such as insurance, remittances, etc, that can also generate fee income for us.
BRR: Your average loan size is Rs 71,000 compared to industry average of Rs 26,000. So, what types of businesses ask for loans?
MA: If we segment the type of businesses then the service industry, trading, manufacturing, livestock and agriculture-related business are amongst the top businesses which consume loans from us. In addition, our clients also represent the surgical goods industry, and the cotton and yarn goods industry.
BRR: What is total employee strength?
MA: We have around 800 employees.
BRR: Are you into consumer financing?
MA: As per SBP's prudential regulations, we cannot give money to persons with an income of above Rs 300,000 per annum and we cannot give an aggregate loan of Rs 150,000. Because of this restriction, options are limited. The SBP has introduced a new provision under 'enterprise lending' which loans up to Rs 500,000/- will be allowed. We are developing a pilot project for the same. Consumer financing can be done and products can be introduced, but we have to work within the SBP regulations.
BRR: What other synergies can FINCA bring in?
MA: FINCA has vast experience in diversified market segments. In some markets, FINCA makes loans as high as $200,000; in Azerbaijan for example, where it is serving a wide cross-section of society. In Pakistan, however, we have to serve a narrow ticket size, and the loan amount is highly challenging. Having said Pakistan has a high potential for the SME market. Being part of a large global network also brings innovation, structural maturity and batter risk management practices.
Last words: Pakistan has a population of 180 million. About 70 percent of the urban population is involved in SME activities, and over 80 percent of farmers in the rural market have less than 10 acres of land holdings. So predominantly, people with low income and poor people are the working people of this country. If we won't give them access to finance, Pakistan will not grow. Mega projects are important, but equally important is providing these working class families the means and support to access mainstream financial services in the country.
So the important thing is to promote and support the microfinance sector; innovate, so that the sector becomes self-sustaining. Scale should increase so that larger organisations are created. I think the SBP has done a tremendous job in framing strong regulations. For the last five years, the SBP has been amongst the top microfinance regulators in the world. All the key ingredients are available in Pakistan, many of which are not present in most of the developing world. We have a world-class regulatory framework, 93 percent of the population has a credible ID, we have a credit information bureau, our financial markets are developed and strong, and our depository institutions have a strong long stable record. All that's needed is to spread awareness of microfinance and bring it into the mainstream.