PACRA Maintains Entity Ratings of Union Microfinance Company Limited | Assigns Rating Watch

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. The Gross Loan Portfolio of the company has grown to PKR 82mln during CY23 (PKR 56mln, CY22). Consequently, the markup earned by the company also increased to PKR 21mln during the year ending Dec 23. However, the company incurred a net loss of PKR 43mln as Union Microfinance Company borrows from commercial banks and the Pakistan Microfinance Investment Company, but its limited income falls short of covering the high costs of funds and operational expenses. However, the company has had no non-performing loans so far. The company's governance structure is adequate, with a board of directors comprising experienced professionals with considerable expertise in the financial sector. The ratings reflect the limited geographical presence of the company that poses a hindrance to growth in the short term, a meager market share in terms of the loan portfolio, and active borrowers. The rating watch incorporates the increase in the non-performing loans and diluted profitability within the microfinance sector triggered by the increased borrowing rates and high inflation which has diminished the disposable income of micro borrowers thus hampering their debt-repaying ability. Further, Union Microfinance’s net losses have consistently surged over the years resulting in the dilution of the equity base of the company to PKR 51.6mln (PKR 62.7mln, CY22) . Moreover, the company's geographical footprint has further decreased owing to the closure of 2 branches during the year signifying its difficulties in materializing projected expansion plans.
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 through the addition of more branches is imperative for the sustainability of ratings.

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 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.