What distinguishes FINCA from other microfinance banks operating in the country is its focus on job-creating, urban, micro and small businesses, and entrepreneurs in need of capital. The rest of the microfinance industry is mostly focused on group lending to small farmers and home-based women workers.

“Micro and small workers account for 75pc of urban employment. They are the businesses that create jobs and account for 70pc of our loan portfolio of Rs7bn,” M. Mudassar Aqil, chief executive officer of FINCA Microfinance Bank, formerly Kashf Microfinance Bank, told this writer in an interview.

But lending to such businesses is a big challenge because of two reasons. One, most urban workers, such as a vendor or even a shopkeeper and retailer, don’t have roots in the city; they are transient and keep moving from one place to another.

About 160,000 small businesses account for a negligible 6pc of the total private sector credit in the country, although they have the capability of creating businesses and living out of very small amounts of capital

Two, cash flow analysis for assessing the repayment capacity of low income businesses or entrepreneurs is also not easy because they do not keep books or written records of their transactions.

These factors also explain the reluctance by the microfinance industry to tap this segment of the market for fear of debt defaults.

According to him, 160,000 small businesses account for a negligible 6pc of the total private sector credit in the country although they have the capability of creating businesses and living out of very small amounts of capital. Consequently, they have to depend on highly expensive and opaque informal loans for their small capital needs.

“Micro and small businesses operating in urban and suburban areas, and small manufacturers like lathe machine workshops, small component makers and artisans are the actual job providers. Majority of them lack capital and are deprived of formal credit because of commercial banks’ over reliance on collateral against loans; and a lack of competence to assess cash flow and repayment capacity of these entrepreneurs. We need easy supply of capital that can go to such people who require small amounts of cash to grow and start businesses, and create jobs,” said Aqil, who has overseen the bank’s rapid growth as CEO since 2011.

FINCA’s average lending rate is 26pc against the industry average of 30pc despite an operating cost of 18-20pc. Yet the price of formal microfinance is much cheaper than informal credit, and small borrowers find it beneficial, the CEO argues. “Our default rate is less than 1pc because micro and small businesses who work in a vicious environment know how to employ small amounts of capital profitably.”

Barring Balochistan, Gilgit-Balistan and Azad Kashmir, the bank has a presence across the country through its 100 branches serving 105,000 borrowers in 87 cities. Its deposits have grown to Rs7.5bn and loan portfolio expanded to Rs7bn. Almost 30pc of its loan portfolio accounts for agriculture lending.

“Our lending focus is on job creation,” Aqil who has worked for 14 years at a leading commercial bank in Pakistan and the United States, says. He adds the bank has helped create almost 0.6m jobs in the last five years.

He is of the view that the existing upper credit limit of Rs500,000 for microfinance banks should be doubled to Rs1m. “Our average loan size is Rs80,000 compared with the industry average of Rs35,000. With small loans you can help a borrower improve his own life. But with a bigger loan you can help him grow in size and create jobs in the economy.”

At the end of FY2015, the bank had improved its pre-tax profits to Rs245m from Rs32m and net interest income to Rs1.36bn from Rs885m in 2014. According to the unaudited accounts for the first quarter of the present year to March, the bank has grown its profit before tax to Rs118m from Rs37m and net interest income to Rs418m from Rs285m a year ago. Aqil said the shareholders are re-ploughing profits back into the bank for expanding its operations and building assets.

He points out that FINCA does not fund start-ups. “We normally work with existing entrepreneurs with a formal place of doing business and in which the owners have invested some kind of equity.

Businesses without an income stream are a risky proposition for lenders like us as 92pc of our loans fall in the category of clean lending. Globally, three quarters of businesses that have no income stream at all fail in six months.”

The FINCA chief says the bank is working on development of new products to meet the needs of women who constitute only 10pc of its borrowers. “The number of women borrowers is so small because they aren’t primary borrowers and do not have a formal place of work. But we are finding solutions to help them just as we are planning to broaden our presence in the rural, agriculture economy.”

He is of the view that the government could boost the microfinance industry to help workers in need of small amounts of capital to survive, grow and create jobs. “It’s not that government is required to actually invest any money from its pocket. No; it just has to intervene through guarantee schemes and incentives.

For example, just by announcing to pick up 40pc risk in crop insurance, the government will massively boost the appetite for micro lending to farmers for their crops.”

Published in Dawn, Business & Finance weekly, July 18th, 2016