The Pakistan Credit Rating Agency Limited
Press Release


Muhammad Nadeem Sheikh

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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 the bank 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 mid-tier player in Pakistan’s microfinance sector (Dec'18: ~8% share in total gross loan portfolio and ~11% share in total microfinance deposits). 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. Liquidity profile remained relatively stretched. FINCA's paramount focus remains on digitizing its operations and strengthening its technological infrastructure to expand its outreach. In this regard, the bank is upgrading its MIS and developing variant digital products to serve diversified market segments, including corporates. Digital banking mix is currently small. Asset health dwindled slightly to ~1.9% at End-Dec18 (CY17: 1.5%). Average loan size of the bank is on the higher side in relation to its peers, which needs to be in check amidst rising industry's infection ratio.
The ratings are dependent upon the bank's ability to sustain its profitability while building up market position. Maintenance of asset quality is also pertinent to the ratings. Successful establishment of foothold in digital banking remains critical amidst stiff competition.

About the Entity
FINCA Microfinance Bank commenced its operations in 2013 and operates with a network of 133 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 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.

About the Instrument
FINCA had issued a privately placed Term Finance Certificates of PKR 500mln with a total value of PKR 1.5bln. The instrument was 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. No further amount has been issued to date. 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.
FINCA is in the process of issuing its second Privately Placed, Unsecured, Subordinated Term Finance Certificate, in the nature of Tier II Capital, with an issue amount of PKR 1,500mln (including green shoe option of PKR 500mln) and tenure of 7 years from the date of disbursement. Profit rate would be 6M-KIBOR+ 2.40% and if declared would be payable semi-annually in arrears on the outstanding principal amount and would be calculated on a 365-days year basis. Tier II PPTFC will be fully and permanently converted into common shares or immediately written off upon the occurrence of non-viability trigger event (the ''PONV''). Moreover, the instrument is subject to a lock in clause, which stipulates that neither profit nor principal will be payable (even at maturity) in respect of the PPTFC, if such payment will result in a shortfall in the issuer’s MCR or CAR.

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.