Branchless is just a channel, banking is the business: CEO UBank

While microfinance is not exactly a novel concept, its popularity took a different stage after the works of Muhammad Yunus, the Bangladeshi Nobel laureate, founded Grameen Bank. The next transformational shift in the industry came from Kenya’s m-pesa which successfully pulled off the branchless banking industry – a model Pakistani telcos embraced with open arms.

Once the network of agents was sizable enough and over-the-counter transactions were coming in, the focus shifted towards digitizing them end to end. This required emptying the pockets to acquire users for the latest app – a tactic that some of the telcos were (and are) more than willing to do. In fact, m-wallets associated with telecom operators have become some of the most popular apps in Pakistan, and not just in the payments category.

UBank, a wholly-owned subsidiary of Pakistan Telecommunication Company Ltd, took a different approach though. It put aside the branchless network for a while and spent all energy on building branches, growing the size of the balance sheet and making it a profitable bank. The model seems to have paid for now, as the company’s total assets have grown at a CAGR of 98.9% since 2015 while the bottom line came in at Rs906m just for 2020.

To get a better understanding of UBank’s turnaround, future plans and the overall outlook for the microfinance industry, Mettis Global interviewed its CEO, Kabir Naqvi. He brings with him an experience of more than 20 years, including serving in the c-suite of Tameer Bank and its subsequent sale to Telenor.

Below are the edited excerpts.

UBank had an impressive 1QFY21 with PAT skyrocketing, but at the same time provisioning declining significantly. Can you tell us about what went down in the quarter? 

KN: Last year, right after Covid-19 struck, the State Bank of Pakistan issued a circular instructing financial institutions to restructure their loans, retrospectively applicable from Jan 1, 2020 till March 31, 2021. This brought down our provisioning since there were no credit losses. Then, the policy rate was cut which in turn slashed KIBOR and reduced our cost of funds. At the same time, we worked on lowering the operational costs which further contributed to better profitability.

On the other hand, the size of our portfolio continued to grow as we added Rs9.5 billion approximately in loans during 1QFY21, compared to the same quarter last year. All of them were actually backed by gold so it improved our risk profile as well.

Microfinance banks generally have a reputation issue when it comes to the cost of funds. As per the SBP data, the weighted average interest rate by end of December was over 30%. What do you think can be done to alleviate these concerns? 

KN: I have been hearing this criticism since time immemorial so let me try to explain the components of that interest rate. Say we charge 32% annualized (asset yield) to the customer, around 12% will go towards operations. We also incur a higher cost of funding than commercial banks, so add another 12% for that. Then the delinquencies will be about 4%, which basically leaves a 4% margin for us.

Unlike the commercial banks, we don’t lend on the basis of cumbersome documentation, ranging from salary slips to housing papers. We rely on social collateral and know how to work with income proxies which raises the riskas compared to conventional methods of customer due diligence. For that, you also need relationship and verification officers for recovery and acquisition of loans. These guys understand the customers well and know if someone’s expecting a baby or if there’s an upcoming cash crunch and that’s not something you can automate. It’s also important to understand that since our loan amounts are quite small, it results in a higher interest percentage on an annualised basis. That phenomenon is even more prevalent in nano finance where, say, you give Rs1,000 to someone for a month at a flat fee of Rs50. Now if you annualise that, the entire picture gets distorted.

The asset yield will naturally come down if the loan amounts go up and that’s our focus too. In fact, the average loan size has grown from roughly Rs50,000 to Rs90,000 over the past five years and it should eventually go up to Rs150,000-175,000. We have already applied for an increase in the maximum disbursement amount for Naya Pakistan Housing Development Authority. The problem is that the industry is still being governed by an Ordinance introduced in 2001, which has obviously become obsolete since the entire landscape has completely changed since then. A revised version is currently in the works.

Unlike other microfinance banks associated with telcos, UBank has an expansive and fast growing branch network. How do you justify this focus on brick and mortar? 

KN: When I took helm of UBank, it was a struggling entity that wasn’t lending to anyone and simply wanted to reap the benefits of the branchless network. Basically meant their asset side of the books was missing. This was the first thing I got to change: my job was to first build a profitable bank which could only be done on the back of branches. Remember we are talking about some of the remotest areas of Pakistan, where you can’t just get the customer to open an app In the five years, the balance sheet has grown from Rs2bn to Rs70bn – making us the third largest microfinance bank in terms of book size – while our 200+ branch network is the biggest.

We need to be clear that branchless is just a channel, banking is the business. That said, in October we rebranded and launched the UPaisa app but at the same, our branches will continue to increase in number as well.

Microfinance has become the sole beneficiary of distributing Tier 0 loans under NAPHDA. How are you looking at this opportunity? 

KN: Even before this scheme was unveiled, one of our strategic pillars approved by the board was housing finance. Initially, the microfinance banks were not included by the decision makers but then we lobbied for it. There are still some demands that need to be met so we are on equal footing with the scheduled banks. For example, the Financial Institutions (Recovery of Finance) Act doesn’t apply to us. We need to be made scheduled banks and then will have all the tools available to lend for housing. The second pillar that the board gave a nod to was Shariah, which has a huge demand. We have already gotten the regulator’s approval for that and will be launching the services in five branches from third quarter.

What’s UBank’s current market position and where do you see the overall microfinance industry heading?

KN: We are the largest player when it comes to the ATM and branch network and would be the third biggest in terms of the loan book. Of the Rs300bn lending, UBank has roughly Rs34bn, next only to Khushhali and First Microfinance BankIn the last five years, our share has grown from just 0.6% to over 10% even as the market itself doubled.

As for the broader industry, I think there are hints of consolidation however the industry will continue to show healthy growth.

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