‘With banks on their side, fintechs can do digital credit wonders’

KARACHI: In a world that is the midst of a digital revolution, partnership between banks and fintechs is critical as it can remove financial services-related kinks at a pace that cannot be matched by traditional banks.

It was stated by M Mudassar Aqil, CEO FINCA Microfinance Bank, during an exclusive talk with The News.

The following are the insights Aqil shared with us, while discussing the future of fintechs and how they can help Pakistan’s economy to grow.

Q: How can microfinance banks go about leveraging fintech [financial technology] in their businesses in Pakistan?

A: Fintech companies are essentially the ones that focus on disaggregating the banking business. There’s plenty of room for improvement in the perception of fintech companies in Pakistan. Predominantly, banks still view fintechs as vendors for doing tech development. This paradigm needs to be shifted because the 21st century model is all about creating alliances and collaboration (with them).

Banks should provide their platforms to the fintech companies for creating an ecosystem for them so that they can innovate and develop solutions for all the stakeholders – banks and, their customers included – and then launch them into the market in collaboration with the banks.

Q: Where does FINCA rank in fintech integration?

A: FINCA is the only example of a true partnership between a fintech and a bank in Pakistan, which is internationally considered as a very progressive and futuristic example. Recently, there has been a case study developed by an international financial training institute on this partnership between FINCA and Finja. It is being taught to people from all over the world who attend that training.

Under this collaboration, FINCA has created a partnership with Finja on revenue-sharing basis and both the companies co-own the SimSim brand. This is a new model of innovation and partnership. This partnership has increased our speed of bringing services to the market and massively enhanced our ability to add new features.

Q: What is the most recent innovative product FINCA launched?

A: We are running a pilot of offering a digital loan, which is called ‘nano’ loan.

A nano loan is a very small amount of loan that is given out through a completely digital process without any human intervention. We are in the process of running the pilot and hope to scale it up in near future.

Q: Does FINCA have its own mobile wallet?

A: Yes, SimSim. This is the first truly telco agnostic digital wallet in Pakistan. We have signed over 350,000 users since its launch a year ago and it has helped us to now digitally align our entire business delivery model. So our entire end-to-end process – from receiving a loan application to its disbursed through SimSim wallet – of serving our clients is now digital. Loan applications are collected by our sales force that uses tablets, processed digitally without paper and loan amount disbursed to the customer’s digital wallet. This is one benefit. The other is that it has allowed us to expand our outreach beyond brick and mortar. So now anyone in Pakistan, no matter where he or she lives, can open a SimSim wallet account and become a FINCA Microfinance Bank client. We didn’t have this ability before.

Q: How do you see the role of microfinance in boosting agriculture credit?

A: In the last few years the contribution of microfinance has been central to growth in agriculture credit in Pakistan. Without microfinance banks’ contribution farm credit would not be on a growth trajectory in Pakistan. We believe microfinance banks are the key to the future of agriculture credit also because more than 80 percent of farmers cultivate less than 5 acres of land. These are the farmers we understand well because we specialise in serving low income entrepreneurs and farmers. This is our forte.

The same goes for the small and medium enterprises (SMEs). Again, the commercial banks have not been able to serve this segment at all and the State Bank has recently increased the ceiling of loan to Rs1 million for microfinance banks. This has allowed us to now start serving the lower tier of SMEs. But I believe as this ceiling improves we can demonstrate similar progress in the SME sector the same way we have done in the agriculture financing.

Q: Do you see any technological risks related to cyber security for microfinance banks in Pakistan?

A: I don’t see any cyber-security-related risks that are unique to microfinance banks. I think all financial institutions regardless of their size are exposed to cyber security risks and this is an area that not only we but the entire sector takes very seriously. We comply with very high technical standards and guidelines from the regulator.

Q: Do you feel any mergers and acquisitions in the microfinance sector in the near future?

A: Mergers and acquisitions are the outcome of growth and maturity of a sector. All the microfinance institutions are performing very well and top 4-5 are rapidly growing. However, as pressure for margins builds up there will be potentially a case for economy of scales and consolidation to make larger institutions with bigger capital base.

Q: What are your [bank’s] future plans?

A: We remain very positive on growth prospects of the microfinance sector in Pakistan. The microfinance sector has been annually growing by close to 40 percent for last five years. I believe that the upside of the sector is still massive. We still have two-thirds of the market that is untapped.

FINCA is going to continue on the growth trajectory with a very keen focus on employing technology. So our digital strategy will be front and center as we move forward. We are also keeping a close eye on the risk side of the business; Pakistan is high growth market and we want to make sure that the growth is factoring in the associated risks as well.

Q: What incentives can help microfinance banks increase their outreach and support growth of smallholder farmers and entrepreneurs?

A: We are doing this now for nearly a million clients in Pakistan and growing very rapidly. We are giving higher returns to our depositors and providing the lifeline to small entrepreneurs in terms of capital they need to grow their businesses. These entrepreneurs – micro, small and medium – in my view provide 75 percent of urban employment in Pakistan. Similarly, 80 percent farmers are smallholders. The engine of Pakistan’s economy is being run by these people and we are providing fuel for that engine.

Giving a small loan of 50,000 rupees to someone who is completely un-documented and lives in a slum is a very high cost and high risk business and we are doing it very efficiently without any government support. More than 90 percent of our loans are unsecured advances. When all is said and done, the risk premium is negligible.

I think there should be some relaxation that should be given to microfinance banks so that they can scale fast. We are growing at a rate which is so fast that whatever earnings we are making we put those back into our equity to grow our capital base as the Capital Adequacy Ratio (CAR) at 15 percent for microfinance banks is much higher than commercial banks. We have to comply with high CAR and majority of our loans are unsecured. The capital charge on our loans is also 100 percent. So we have to constantly put more and more capital in the bank to mainly meet CAR requirement.

So if microfinance banks are able to increase their earnings all of that will go back into enhancing our equity base so that we can grow our loan portfolio and put money back into the pockets of small entrepreneurs and smallholders. So there is a very strong case here for incentives for taking extra risk for commercial investor who is putting his money into a microfinance bank versus a commercial bank. Those incentives need to be created.