PACRA Revises Entity Ratings of Union Microfinance Company Limited

Union Microfinance Company (the Company) is a public company limited by shares and was incorporated in Pakistan as a Non-Banking Finance Company in July 2021, under the license issued in terms of rule 5(6) of the Non-Banking Finance Company Rules 2003 and Companies Act, 2017 The company was incorporated with a mission to tap the unbanked population and bring them into the ambit of financial inclusion, with a special focus on women, particularly those working in the cottage industry across the country. The Company’s loan portfolio comprises mainly three types of products: Union Salary Loan, pensioners’ loan, and Union Gold loan (secured by gold). As an MFI, Union Microfinance Company faces funding constraints as it cannot mobilize deposits. The company relies on shareholder equity, loans, and internal profits to fund its operations. The Company is a relatively newer player in the sector, which explains its limited footprint, constrained to a single branch. During CY24, the Gross Loan Portfolio (GLP) of the company has significantly declined to PKR 21mln during CY24 (PKR 82mln, CY23). However, the markup earned by the Company remained at ~PKR 25mln during the year ending Dec-24 (CY23: ~PKR 24mln). The Company’s governance structure is adequate, with a board of directors comprising experienced professionals with considerable expertise in the financial sector. The revised ratings of the Company reflect a decline in asset quality, insufficient liquidity, and funding constraints from the lenders. The rating watch incorporates the decrease in the loan portfolio and deteriorated profitability within the microfinance sector, triggered by the lack of funding. Further, Union Microfinance’s net losses have been consistent over the years, resulting in the dilution of the equity base of the Company, but this year, a sub-ordinated loan has increased the equity to PKR 61mln (PKR 52mln, CY23). This ongoing loss trend has depleted equity levels, putting further pressure on the entity's credit ratings. Going forward, the management of the Company informed that they have been taking strategic measures by planning an equity injection to expand the loan portfolio and improve the financial position of the Company.
The Company’s ratings are contingent upon its ability to attain positive performance metrics in terms of growth in market share, net profitability, and equity base. Further, enhancement in the Company’s footprint and loan portfolio through the addition of more branches is imperative.

About the Entity
Union Microfinance Company (the Company) is a public company limited by shares and was incorporated in Pakistan as a Non-Banking Finance Company on July 27, 2021, under the Non-Banking Finance Company Rules 2003 and the Companies Act, 2017. The Company was granted a license by the Securities and Exchange Commission of Pakistan on September 30, 2021. The overall control of the Company vests in individuals with strong financial backgrounds and extensive knowledge of the microfinance industry. Mr. Zahair Amir Ali Pesnani holds 39.99% shares of the Company, and he has over 30 years of working experience in the financial sector.