Union Microfinance Company Limited

CREDIT RATING REPORT | Apr-25

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
25-Apr-25 BB A4 Stable Downgrade YES
26-Apr-24 BB+ A3 Stable Maintain YES
26-Apr-23 BB+ A3 Stable Initial -
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.

Rating Rationale

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.

Key Rating Drivers

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.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Union Microfinance Company Limited

rating analysis

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Profile
Structure

Union Microfinance Company Limited (hereafter as “UMCL” or “the Company”) is a Non-Banking Finance Company (NBFC) registered under the license issued in terms of Rule 5(6) of the Non-Banking Finance Companies (Establishment & Regulation) Rules, 2003 (NBFC Rules).


Background

UMCL was established in July 2021 and started its operations in February 2022 with a branch at Jami Commercial Street, DHA, Karachi. UMCL operates with the mission to tap the unbanked population and bring them into the ambit of financial inclusion. The Company has taken up a special focus on women, especially those working in the cottage industry, across the country.


Operations

Union Microfinance Company Limited operates under the for-profit model and provides small loans to low-income individuals. The Company offers mainly three types of products; Union Gold Loans (secured with gold), Union Salary Loans, Pensioners’ Loans. The Company targets and caters to individuals in the health and education sectors, and also home-based businesses being run by skilled women. Currently, UMCL operates only one branch in Karachi.


Ownership
Ownership Structure

The Company is owned by Five individuals, where Mr. Zahair Amir Ali Pesnani has a major shareholding, owning ~39.99% of the shares, whereas the rest of stake is owned by Mr. Ali Remioo (30%), Dinar Farrukh Punjwani (17%), Ms. Sharmeen Ali (15%), Mr. Altaf Kasim Allana (4%) and Mr. Syed Saeed Raza (0.01%).


Stability

The ownership structure is deemed stable as the ownership stake is expected to remain with the same sponsors going forward. However, there is a need for formal succession planning which will further enhance the stability going forward.


Business Acumen

Union Microfinance is owned by individuals with good financial backgrounds and knowledge of the financial sector hence the business acumen is considered adequate.


Financial Strength

The sponsor’s financial strength is considered adequate as the sponsors are committed to extending support to the Company in case any such need arises. Currently, the Company’s financial health is at crucial stage due to which the management is working on adequate equity injection to enhance the Company’s loan portfolio and overall financial profile.


Governance
Board Structure

The Board of Directors (BoD) comprises four members. Three are sponsors and act as Non-Executive Directors whereas one is executive director (the CEO). The board is chaired by Mr. Zahair Amir Ali Pesnani.


Members’ Profile

All of the board members have international exposure and carry diversified expertise. Most of the members have been associated with providing microfinance services for a long time. The Chairman of the board is a qualified Chartered Accounts with a diverse experience of more than 3 decades in the financial services sector.


Board Effectiveness

The Board meets at regular intervals to oversee the Company’s performance and provide strategic guidance. The board has established three committees for oversight of responsibilities. These are (i) HR & Remuneration Committee (ii) Risk Management Committee & (iii) Audit Committee. These committees add to the board’s effectiveness in steering the Company toward its strategic objectives. The induction of independent directors can further enhance the effectiveness of the board.


Transparency

As of CY24, audited financial statements have not been provided to the rating team. The current assessment is based on management-provided accounts.


Management
Organizational Structure

Eight departments make up the Company’s horizontally distributed organizational structure. Each department has a distinct head. The CEO is the direct supervisor of every department head. Each level's reporting structure and job descriptions are specified. All the key positions have been filled.


Management Team

Key management personnel are qualified professionals with considerable expertise in the relevant industry. Mr. Mumtaz Hadi (the CEO) has over 25 years of experience in multiple domains of the financial services sector. Whereas, Mr. Abdul Ghani leads the credit and risk function. He possesses over 3 decades of experience in credit risk management.


Effectiveness

A well-defined organizational structure along with clearly defined roles and responsibilities augments the effectiveness of the management. It is further strengthened by the presence of a Management Committee, composed of all the departmental heads, to facilitate inter-departmental coordination and streamlining the operations.


MIS

The Company has an MIS, “Munsalik’s Shared Services” in place. Munsalik’s Shared Services Platform has been envisioned to digitize Microfinance Institutions without large-scale technology and infrastructure investment.


Risk Management framework

As per the management, the Company has in place a separate Risk Management department to oversee various risks including credit, operational, and market risks. A risk management manual containing guidelines for credit, operational, liquidity, and market risk is in place to help senior management improve risk management as informed by the Company’s management. Furthermore, a dedicated internal audit department is in place that reports directly to the board’s audit committee and ensures compliance with approved operating procedures.


Technology Infrastructure

The Company has introduced a convenient and easily accessible product suite consisting of a Loan Management System (LMS) which digitizes the loan management processes (i.e. customer onboarding & loan origination) and a middleware (IRIS) whereby one integration provides access to all the branchless banking players in the financial ecosystem and third-party services providers.


Business Risk
Industry Dynamics

As of FY24, Pakistan’s microfinance industry, comprising Microfinance Institutions (MFIs), Microfinance Banks (MFBs), and Rural Support Programs (RSPs), continued its growth trajectory. The Gross Loan Portfolio (GLP) expanded by ~9.4% to PKR 597.6bln from PKR 546.1bln in CY24, with MFIs and RSPs contributing PKR 137.44bln and an active borrower base of 3.13mln. The sector comprises 24 specialized microfinance institutions. The Portfolio at Risk (PAR 30) ratio remained stable at ~4.47% in 4QFY24, marginally improving from 4.48% in 3QFY24. Despite inflationary pressures, total disbursements increased by PKR 4.7bln to PKR 154bln in 4QFY24, though the average loan size declined by ~PKR 3,229 to PKR 14,493, reflecting a shift towards smaller loan amounts. HBL Microfinance Bank maintained its lead with a GLP of ~PKR 101bln, followed by UBank at ~PKR 75bln. The industry’s sustained expansion highlights its resilience and critical role in advancing financial inclusion and economic development in Pakistan.


Relative Position

Incorporated in July 2021, Union Microfinance entered the microfinance industry as a new operator while adopting a cautious strategy. The Company is still in the early stages with a small loan portfolio of PKR 21mln as reported on Dec’24. Going forward, expanding the active borrower base and asset quality will be vital to improve the relative position of the Company.


Revenue

During CY24, the Company's topline remained unchanged on an annualized basis and stood at PKR 25mln (CY23: PKR 24mln), owing to an increase in markup on advances.


Profitability

The Company’s performance during the period wasn’t sufficient to cover the overall expenses including operating expenses, provisions, finance costs, and taxes. During CY24, the net loss of the Company stood at PKR ~37mln (CY23: PKR 43mln).


Sustainability

The Company is currently navigating challenges related to portfolio expansion. Management has indicated plans for strategic shifts, including a prospective equity injection expected to improve the Company’s financial position. The Company's management also informed that a revised business plan will be shared in due course.


Financial Risk
Credit Risk

Union Microfinance's loan book is primarily concentrated in gold-backed EMI & bullet loans, representing ~76% of the total portfolio which provides the Company with a considerable credit risk mitigant as reflected by Nill write-offs during the review period.


Market Risk

Currently, no investment book is being maintained by Union Microfinance Company Limited due to which the Company is devoid of a liquid cover. Moreover, reducing interest rates and stiff competition in the microfinance market also pose challenges to the Company.


Funding

During CY24, the Company’s borrowings from financial institutions decreased to ~PKR 2mln as of Dec’24 (CY23: ~PKR 92mln). Previously, the Company had secured funding from JS Bank and Pakistan Microfinance Investment Company Ltd. During CY24, the equity base of the Company increased to PKR 61mln (CY23: ~PKR 52mln) owing to an increase in sub-ordinated loan. Currently, the sponsors are working to inject further equity to enhance the Company’s capitalization structure and loan portfolio.


Cashflows & Coverages

The Company’s liquidity profile is considered adequate as the total finances to total assets ratio stood at 30.3%. During CY24, the portfolio yield of the Company stood at ~44.5% (CY23: ~35.8%).


Capital Adequacy

SECP has no minimum requirement for NBFI, unlike SBP which requires MFBs to maintain their CAR at 15%.
 
 

Apr-25

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Union Microfinance Company Limited

financial summary

(PKR mln)

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Dec-24
12M		 Dec-23
12M		 Jun-22
12M
A. BALANCE SHEET
1. Total Finances - net 21 82 58
2. Investments 0 0 0
3. Other Earning Assets 0 0 0
4. Non-Earning Assets 49 70 42
5. Non-Performing Finances-net 0 0 0
Total Assets 70 152 100
6. Deposits 0 0 0
7. Borrowings 2 92 12
8. Other Liabilities (Non-Interest Bearing) 6 9 8
Total Liabilities 8 101 19
Equity 61 52 81
B. INCOME STATEMENT
1. Mark Up Earned 25 24 5
2. Mark Up Expensed (23) (15) 0
3. Non Mark Up Income 5 3 1
Total Income 7 13 6
4. Non-Mark Up Expenses (43) (56) (24)
5. Provisions/Write offs/Reversals 0 (0) (0)
Pre-Tax Profit (36) (43) (19)
6. Taxes (0) (0) (0)
Profit After Tax (37) (43) (19)
C. RATIO ANALYSIS
1. Performance
Portfolio Yield 44.5% 35.8% 33.9%
Minimum Lending Rate 127.5% 101.4% 176.6%
Operational Self Sufficiency (OSS) 38.9% 39.0% 23.2%
Return on Equity -64.9% -75.5% -47.1%
Cost per Borrower Ratio 61,497.9 105,361.6 311,145.9
2. Capital Adequacy
Net NPL/Equity 0.0% 0.0% 0.0%
Equity / Total Assets (D+E+F) 88.3% 33.9% 80.7%
Tier I Capital / Risk Weighted Assets N/A N/A N/A
Capital Adequacy Ratio N/A N/A N/A
Capital Formation Rate [(Profit After Tax - Cash Dividend ) / Equity] -71.1% -68.8% N/A
3. Funding & Liquidity
Liquid Assets as a % of Deposits & Short term Borrowings N/A N/A N/A
Demand Deposit Coverage Ratio N/A N/A N/A
Liquid Assets/Top 20 Depositors N/A N/A N/A
Funding Diversification (Deposits/(Deposits+Borrowings+Grants)) 0.0% 0.0% 0.0%
Net Advances to Deposits Ratio N/A N/A N/A
4. Credit Risk
Top 20 Advances / Advances 0.0% 5.5% 29.7%
PAR 30 Ratio 0.0% 0.0% 0.0%
Write Off Ratio 0.0% 0.0% 0.0%
True Infection Ratio 0.0% 0.0% 0.0%
Risk Coverage Ratio (PAR 30) N/A N/A N/A

Apr-25

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Union Microfinance Company Limited

rating scale

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Apr-25

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Union Microfinance Company Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
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    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
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  6. Probability of Default
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Apr-25

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