The Pakistan Credit Rating Agency Limited
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Saniya Tauseef

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PACRA Maintains Entity Ratings of FINCA Microfinance Bank Limited

Rating Type Entity
Action Maintain Maintain
Long Term A A
Short Term A1 A1
Outlook Stable Stable
Rating Watch - -

The ratings reflect association of FINCA Microfinance Bank (FINCA) with a global microfinance organization – FINCA International. This affiliation supports FINCA Microfinance Bank in terms of building a wholesome strategy and also in establishing robust systems and controls. FINCA is a major player in Pakistan’s microfinance sector (Dec’17: ~7% share in total gross loan portfolio and ~10% share in total microfinance savings). The bank intends to build a stable and diverse deposit base. Given that the current deposit landscape is very competitive, building a granular (as well as low cost) deposit base is challenging. It has arranged sizeable running finance lines from various banks to support funding base. Sustained operational efficiencies in CY17 led to improved core profitability to an appreciable level. Asset quality remained strong although delinquency ratio dropped slightly. Meanwhile, the bank is eyeing tier II capital to strengthen its capital base. FINCA's focus remains on digitizing its operations and strengthening of its technology infrastructure to expand its outreach. In this regard, it has already tapped on branchless banking domain through its mobile application SIMSIM which has increased its outreach to over ~120,000 customers by End-Dec'17. Many new products are on the cards. Improvement in performance indicators for branchless banking would gradually transpire. Strong banking practices with extended branch network acclaims FINCA’s efforts to provide long term solutions to their customers.

The rating is dependent upon FINCA’s ability to sustain its operational profitability while improving its market position. Progressing towards growth trajectory in digital banking remains critical amidst rising competition. With growing loan book, related risks mainly include sustenance of good credit quality, liquidity management and asset health. Successful execution of business strategy by the management team is imperative.

About the Entity
FINCA Microfinance Bank commenced its operations in 2013 and operates with a network of 116 branches. The bank is majorly owned by FINCA International (86.4%), through FINCA Microfinance Cooperatief U.A; a commercial arm registered in Holland. Kashf Holdings, the initial founder of the bank, holds ~5.2% stake in the bank. The remaining stake is distributed among i) International Finance Corporation (4.9%), ii) Triodos Fair share fund (2.7%) and iii) Accumen Fund Pakistan (0.8%). FINCA, offers a diversified range of financial products and services. With its upheld standard of services, FINCA scores the position of first bank of the country being awarded the “Smart Certification”.

About the Instrument
FINCA has issued a privately placed Term Finance Certificates of PKR 1.5bln. The instrument is issued in three equal installments within the availability period of nine months ending in Aug'18. First tranche of PKR 500mln was issued in Nov’17. The instrument has a tenor of 5 years from first installment and shall be redeemed in 16 equal quarterly installments starting from 15th month of the first draw-down. Profit is paid quarterly at a mark-up of 3 months KIBOR + 1.50%. The instrument is secured against first pari passu charge over all future and present current assets along with 25% margin.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.