Specialised Bank: KHUSHHALI BANK - Year Ended December 31, 2005 (Audited)

Khushhali Bank (Khushhalibank), a for-profit, commercial, microfinance institution came into existence with the promulgation of the Khushhali Bank Ordinance, 2000 as a corporate body with limited liability on August 4, 2000.
The State Bank of Pakistan (the SBP) issued license on August 11, 2000 and it commenced its operation from a remote village in Dera Ghazi Khan. It is country's first major initiative to bridge the demand for microfinance services to establish a sustainable pro-poor financial services platform with retail delivery capacity.
Khushhali Bank, with its principal place of business at Islamabad, had 63 branches on December 31, 2005 (2004: 52 branches) and is licensed to operate nation-wide. The number of employees including those on contract as on December 31, 2005 was 1,576 (2004: 1,171). The bank's line of products includes short-tenure micro loans ranging up to US $500 for working capital and asset purchase. It operates on a community-based service delivery mechanism and forms client clusters to reduce transactional costs.
The GOP has obtained a loan of US $150 million from the ADB to support the operations of Khushhalibank and to promote microfinance sector in Pakistan. The bank utilises a US $70m component of this loan for micro-loans to the poor particularly to women of country's rural and urban areas and a US $10m component has been allocated toward institutional capacity building. Another US $70m component has been allocated to support policy reforms of microfinance sector in Pakistan.
Four endowment funds have been established at the SBP to support the poor with periodic contributions from both, the GOP and Khushhalibank to ensure sustained ownership. They include: (i) Microfinance Social Development Fund of US $40 million for supporting social mobilisation activities within poor communities; (ii) Community Investment Fund of US $20 million for supporting development of community infrastructure such as water channels, link roads etc in particular in the under-serviced rural areas; (iii) Risk Mitigation Fund of US $5 million for providing risk mitigation cover to micro borrowers of the Khushhalibank; and (iv) Deposit Protection Fund of US $5 million for providing protection to micro depositors of the Khushhalibank.
The authorised capital of Khushhalibank is Rs 5 billion, comprising 5,000 shares of Rs 1 million each. As on December 31, 2005 the paid up capital is Rs 1.705 billion, which is held by the following 16 banks, as under:

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                              (Rs million)  % of Total

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National Bank of Pakistan             400          23%

Habib Bank Limited:                   300          18%

MCB Bank Limited:                     300          18%

United Bank Limited:                  200          12%

Allied Bank Limited:                  200          12%

Askari Commercial Bank Limited:        50           3%

Standard Chartered Bank:               50           3%

Citibank N.A.:                         50           3%

Bank Al Habib Limited:                 30           2%

Union Bank Limited:                    30           2%

Soneri Bank Limited:                   25           1%

Metropolitan Bank Limited:             25           1%

Prime Commercial Bank Limited:         15           1%

KASB Bank Limited:                     10           1%

Saudi Pak Commercial Bank Ltd:         10           1%

MyBank Limited:                        10           1%

Total:                              1,705         100%

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The shares of the bank cannot be sold or transferred by a member before a period of five years from the date of subscription. Thereafter such sale/transfer shall be subject to prior approval of the SBP, pursuant to section 10 of the Khushhali Bank Ordinance, 2000. The profits of the bank are not distributable and are applied towards the promotion of its objectives.
The resources available as on December 31, 2005 to Khushhalibank for its pioneering and difficult task comprise shareholders equity (31 % of Total Assets), loans from the ADB, the GOP and financial institutions (69 % of TA), grants from the GOP and the US AID. There are no deposits, which normally are the mainstay of any bank. The resources as on December 31, 2005 have been tied up in Advances (30 % of TA), Investments (22 % of TA), Lending to Financial Institutions (14%), Other Assets (9%), Fixed Assets (4%) and Cash (21 % of TA). In the absence of any deposits, cash balance is considered exceptionally high.
Total assets of the bank increased by b37% to Rs 6.164 billion on December 31, 2005 compared to Rs 4.508 billion on December 31, 2004. Investments and Advances saw major increase which has been largely financed through borrowings. As on December 31, 2005 Investments increased by 21% to Rs 1.374 billion (22% of TA) compared to Rs 1.133 billion (25% of TA) as on December 31, 2004. Of the total, the bank has 88% investments in Available for Sale Securities (2004: 100%).
The bank's Advances as on December 31, 2005 were Rs 1.848 billion (30% of Total Assets), registering 39% increase on previous year Advances at Rs 1.329 billion (29% of TA). All Advances are for Micro Credit.
Khushhalibank generated pre-tax profit of Rs 26.286 million for the year 2005 against the operating pretax loss of Rs 39.202 million in the previous year which was mainly due to abnormally high administrative expenses (150% of total mark up income). The bank closed 2005 with after tax profit of Rs 13 million (2004: Loss Rs 30 million). ROE is negligible. Performance statistics are given below.
The bank is in its initial years of operation in an area which is difficult and therefore deserves nurturing by all stakeholders particularly the GOP and the shareholders. The bank's lending cost at 20% mark up is high and might be brought down considerably. Apart from controlling its administrative cost, the bank might explore mobilising deposits from general public.

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Performance Statistics            (Audited)   (Rs million)

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Balance Sheet (As on December 31)     2004            2003

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Total Assets:                        6,164           4,508

Cash & banks:                        1,309           1,373

Investments-Net:                     1,373           1,133

Advances-Net:                        1,848           1,329

Deposits, other accounts:                0               0

Total Liabilities:                   4,283           2,639

Share Capital:                       1,705           1,705

Reserves, Retained earnings:            44              34

Surplus on Revaluation of Assets:      -10               3

Deferred Grant:                        142             127

Sub-total:                             132             130

Total Equity:                        1,881           1,869

Subordinated Loan:                       0               0

Equity and Sub. Loans:               1,881           1,869

Contingencies and Commitments:          20               7

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Ratios:

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Cash and bank/Total Assets:             21%            30%

Investments/Total Assets:               22%            25%

Advance/Total Assets:                   30%            29%

NPLs/Advances-Gross:                     5%             6%

Provisions/Advances-Gross:               4%             5%

NPLs-net/Advances-net:                   1%             2%

Deposits/Total Assets:                   0%             0%

Total Liabilities/Total Assets:         69%            59%

Total Equity/Total Assets:              31%            41%

Equity and Sub. Loans/Total Assets:     31%            41%

Contin.& Comm./(Equity+SL)-X:         0.01            0.00

Book Value Per Share:                11.03           10.96

Income Statement                      2005            2004

Markup/interest earned:                477             218

Markup/interest expensed:               76              23

Net Markup/interest income:            401             195

Provisions and write offs:              90              62

Net mark up after provisions:          311             133

Total non-markup income:               222             155

Income before Admn. Exp.:              533             288

Admin expenses:                        506             327

Profit before Taxation:                 27             -39

Profit after taxation:                  13             -30

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Ratios:

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Markup earned/Total Assets:            7.7%           4.8%

Net Markup Income/Total Assets:        6.5%           4.3%

Net markup (aft. Prov.)/TA:            5.0%           3.0%

Non-Markup Income/Total Assets:        3.6%           3.4%

Income before AE/TA:                   8.6%           6.4%

Admin expenses/Total Assets:           8.2%           7.3%

Profit before Taxation/Total Assets:   0.4%          -0.9%

Profit after taxation/Total Assets:    0.2%          -0.7%

Profit after tax/Total Equity:         0.7%          -1.6%

EPS-(year-end paid up)-Rs:            0.08           -0.18

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Cash flow Summary                     2005            2004

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Net Cash flow, Operations:          -1,505            -881

Net Cash flow, Investing:             -373            -260

Net Cash flow, financing:            1,815           1,316

Change in Net Liquidity:               -63             175

Net Liquidity at Beginning:          1,373           1,198

Net Liquidity at end:                1,310           1,373

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