The Pakistan Credit Rating Agency Limited
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Sehar Fatima

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PACRA Maintains Entity Ratings of FINCA Microfinance Bank | Assigns Negative Outlook

Rating Type Entity
(15-Apr-22 )
(28-Apr-21 )
Action Maintain Maintain
Long Term A A
Short Term A1 A1
Outlook Negative Stable
Rating Watch Yes Yes

The ratings incorporates the association of FINCA (“the Bank”) with a global microfinance organization – FINCA International. This affiliation supports FINCA Microfinance Bank in terms of building a strategy and also in establishing robust systems and controls. FINCA is a mid-tier player in Pakistan’s microfinance sector with ~4.3% share in total gross loan portfolio. The Bank reflects its presence across the province with 130 branches in and around 13 districts. While growth strategies for the Bank have been taken under consideration, overall performance indicators reflected a deteriorated outlook in CY21 amidst economic slowdown lately exacerbated by the aftermaths of global pandemic spread. Consequently, the Bank’s GLP witnessed a substantial decline. Asset quality impaired significantly, as deferred book to total GLP was sizeable. Further challenges in recovery and markup suspension led to decreased markup earned. SBP’s recent circular pertaining to further relaxation in recording provisioning expense of NPLs is expected to bring reversal. However, full recovery of principal amount will remain essential to avoid further dent in profitability. Bottom line of the Bank decreased manifold. Management’s commitment to recoup the asset health and consolidate the Bank’s position within the stipulated time is an acute necessity. Moreover, since the projected outlook of the Bank indicates absorbing significant cash losses, timely yet matching sponsor support through Equity injections is essential. Though SBP’s Relief Packages have come handy to the sector in protecting the credit quality of the players during the previous waves, the out-turn of the situation, and its relative impact on the risk profiles of industry players, including FINCA, is yet to unfold in the days to come.
The ratings are dependent upon the out-turn of management’s plans to steer the risk profile of the Bank towards improved trajectory. Timely Sponsor Support is imperative. The assigned outlook is reflective of the short-term challenges that the Bank's business and financial risk profile are facing, particularly reflecting in high infection ratio and diminution in GLP along-with constrained profitability. “Watch” reflects the need to oversee the risk profile of the Bank against unavoidable challenges, going forward.

About the Entity
Kashf Holdings (Pvt.) Ltd. established the bank in 2008 with the name of KASHF Microfinance Bank Ltd. In 2013, FINCA International acquired majority ownership in the bank, through dilution of Kashf Holdings' shareholding. FINCA International has a majority stake of 86.4%, through FINCA Microfinance Cooperatief U.A; a commercial arm registered in Netherlands. Kashf Holdings (Pvt) Ltd. holds a 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) Acumen Fund Pakistan (0.8%). FINCA, offers a diversified range of financial products and services. The bank operates with a network of 128 branches. Mr. Jahanzeb Khan - CEO – possesses 24 years of experience with one of the largest financial services institutions. He is assisted by an experienced management team.

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.