Shahid Mustafa is a global professional, having worked in an array of roles in multiple geographies. He is one of the three founders of what is now the most profitable microfinance bank in Pakistan: Telenor Microfinance Bank. During his career, he has managed change, built and run businesses and managed diverse teams.
BR Research had a discussion with Shahid, encompassing the issues surrounding the industry in general and the company’s plan in specific. The discussion also covers aspects of Telenor Microfinance Bank’s recent deal with the renowned Ant Financial. Below are edited excerpts from the conversation.
BR Research: You are one of the founding members of this organization, so tell us about your journey from the beginning to date.
Shahid Mustafa: Initially we were three people, who left Citi Bank together. Nadeem Hussain was the senior most, and he became the CEO. I and Ali Abbas were the other two to join Nadeem. We launched the bank with money from our own pocket, and then got the IFC and other investors coming in.
In 2007, Telenor came on the board as shareholder and in 2009 EasyPaisa was launched. I left in 2012 to pursue other things in life, and in 2017 I was approached by Telenor, after it was completely purchased. I came on board in August 2017. During the time I was away, Tameer Bank was changed to Telenor Bank, and it has done a lot of interesting things since then.
We have got 177 branches, which give approximately 40,000 loans every month. These loans are for our microfinance customers, where the average loan size is about Rs60,000. Some of these loans are collateralized, but most are not. Around one-fourth of these loans are collateralized.
In terms of pricing, we are the cheapest microfinance bank in Pakistan. That is because we have such a scale, which enables us to reduce our prices. Microfinance is often criticized for being expensive, but the comparison with conventional lending is unjust, because the average loan size means our cost of managing is high. We still offer the cheapest rate, which tells we are more sensitive to customer issues.
BRR: Your recent transaction with Ant Financial has received much hype. Take us through what it means having Ant Financial as a major shareholder.
SM: The transaction with Ant Financial now means it owns 45 percent of Telenor Bank. Ant Financial is the world’s largest Fitch company and we feel it brings enormous expertise with it, which will help us achieve the scale in financial services. Achieving that level of scale has been an elusive goal for Pakistan and we want to work with and learn from Ant Financial, on how to make this society cash-light, and not necessarily cash-less.
Going light on cash is important and has its benefits. Around only 2 percent of transactions in Norway are done in cash. Pakistan’s numbers are the exact mirror image of Norway, where cash transactions, even today would be around 97-98 percent of the total.
BRR: Why is it so important to get rid of cash?
SM: It is important because cash is a very inefficient means of transaction. If you have too much cash, it is a drag on the economy as of whole. It is undocumented, and it does not benefit from the multiplier effect because it is not in a bank. It hinders the creation of money, credit, and investments.
In India, cash per capita is one-third of that in Pakistan. We need to aspire to that, as we have the lowest saving-to-GDP ratio in the entire region and the highest cash in circulation to bank deposit in the region. This needs to change quickly, for the economy to benefit from the advantages of being light on cash. These problems will eventually be solved down the line without any doubt. The question that we faced is that will we be the ones to solve it or let somebody else solve it. We decided to be the people to find the solution and that is why Ant Financial came to Pakistan and chose us. The reason they chose us was we are the most light footed and most agile of all our peers.
BRR: Could you shed more light on what is Ant Financial all about?
SM: Ant Financial has 600 million users in China and 200 million users in subsidiaries around the world, with more than half of those in India. They do around 550 million transactions per day. They have achieved this size in about nine years, and are now bigger than Visa and Master Card combined.
BRR: What is that you will do differently now that Ant Financial is here?
SM: What Ant Financial brings to the table is scalability, of m-commerce and e-commerce. More and more volume is passing online these days. The likes of Taobao have unlocked the potential of small businesses, and the platform ends the exploitations of small businesses. All of this would need a secure payment system, and that is what we are eyeing at.
BRR: When you talk about scalability, what is the level that you think is essential for a growing market like Pakistan?
SM: Today, only about 17 percent of the adult population in Pakistan has an active bank account. And if you raise the bar from 180-day active to 30-day active, the number would probably be less than 10 percent. That means that more than 80percent of the adult population are using cash, hundi, and other such means. And by definition, they are stuck within a certain economic cycle.
Once you have a new avenue and have a bank account, it opens more ways of doing business, selling your products anywhere, and getting paid from anywhere. In a country like Pakistan, our target should be around 50 percent of the adult population in the formal network, but that is a short term target of five years.
BRR: What is the number of borrowers on your book and what is the average deposit size?
SM: We have approximately 0.6 million borrowers as of today. In terms of depositors, if you count Easy Paisa, the number will be in millions. We have about 20 million wallets, of which around 5.5 million are 90-day active.
BRR: Why is the share of active wallets is still low?
SM: There is a learning process, as people still are not fully aware of the usage possibilities. And we partly share the blame too, as we have not brought up more use cases up. We will surely have to build more use cases for wallets to increase active wallets, such as insurance and international remittances. We have recently launched our international remittance service, which allows any receiver to walk into any of our 40,000 agents and have an account opened with ease and receive remittances. More importantly, it will reduce cash aspect of remittances, which is very high at the moment. We offer special m-wallet for international remittance which has no tax.
BRR: How do you go about assessing the repayment capability of a certain borrower?
SM: Most of the lending is primarily though our branch network. Our delinquency is close to 1 percent and the secret of microfinance success is assessment of the customer. A very good customer for a Rs50,000 loan could be a definite defaulter for a Rs100,000 loan. We have been successfully doing the right assessment for 13 years, and have an efficient assessment methodology in place.
BRR: What is the average mark-up rate in the microfinance sphere?
SM: Our main product is priced at a flat 18 percent.
BRR: And how does your rate compare to that in the region?
SM: We are the cheapest in Pakistan, by a significant margin. We attract customers with better credit history, and those with not good credit histories, usually go to the more expensive options.
BRR: Do you have any plans to venture into the consumer financing?
SM: Under the microfinance ordinance, we are not allowed to do consumer financing. There is a new license for digital banking that is coming out. If, and when it comes out, we will look at it very closely and see if that makes sense for us.
BRR: Tell us about your insurance offerings and if you have any plans to bring new products in the insurance sphere.
SM: We have multiple insurance offering, some of which are bundled with our loan products. Some are standalone; some are over the m-wallet. Banking is now one of the biggest channels for insurance, and within banking, we are one of the bigger players.
BRR: How do you see the futures of over-the-counter transactions, given the m-wallets are slated to dominate in the future?
SM: Eventually m-wallets will dominate for two reasons. The regulation makes it more and more difficult for OTC, because the regulator thinks there is high risk of money laundering and terrorism financing. Secondly, we find it a better option in m-wallet because it has a much higher stickiness.
BRR: Why is that only half your agents offer the account opening facility?
SM: Of our total agents of about 75,000, about 60 percent have it. The reason is that each machine costs about Rs25,000, so we only give it to the agents where there is sufficient footfall.
BRR: Do you see the overall costs coming down now that you have Ant Financials with you?
SM: I think the costs will have to come down, and are down already, in a way. The cost of doing a fund transfer with m-wallet is already lower than OTC. That would mean lower revenues as well, which means we assume the volume will increase to make up for the reduction in price. But I think, our biggest area of improvement is how we communicate our message. I strongly feel that the traditional methods do not work in these kinds of things. So we are going to see how we can work with digital marketing.
BRR: How has the growth been in terms of volumes in the past few years? Has it grown in the double-digits and can we expect it to grow at a brisk pace going forward?
SM: Branchless working witnessed huge from 2009. The numbers in 2017 for the industry growth were pretty flat. We are getting to a plateau there.
BRR: Don’t you think it is too early for the industry to have reached a plateau?
SM: I completely agree it is too early. I think there are fundamental structural flaws in the offerings that have led to this. One structural flaw is that all offerings of branchless banking with some scale are being done through telco distribution models. Those models were designed for telco volumes. Banking volumes are much higher than the telco volumes.
What is happening is that we are now hitting the telco distribution model limits of cash flow. If you want to go further, you have to add other value chains; such as petrol pumps, pharmacies, courier centers, and so on.
Right now it is mostly airtime top up, and if you add all players, it would be around Rs600 million per day. The cash available for telco sales is not enough, and the retailers will have cash out or credit out. Today, if I just depend on telco flows, I need to replenish my cash or credit, maybe three times a day. That is why; this channel is reaching a limit.
The most interesting thing is that the velocity of change is now very high. The people who are least developed, for example, Kenya, have the fastest adoption rate, because they do not have the baggage.
BRR: Lastly, what is your take in the state of regulation? Are you satisfied with how the regulator has handled it so far or are there things that you want to improve from the regulation viewpoint?
SM: Regulation is a living thing which responds to the market needs. I think, we are moving in the right direction on most fronts. The digital banking regulation is a sign of major change. The likes of PayPal have not come to Pakistan because of very stringent and cumbersome banking regulations. Once you open licenses for FinTech, the marginal banks will feel the pinch.
The SBP is not in the business of protecting bank owners; its job is to ensure people get the best financial services at best cost, and safety.
BRR: Do bigger banks pose any threat to encroach in your space?
SM: I think the bigger banks are a threat to no one, but the new entrants are surely a threat to bigger banks. Just wait and see how they will take away their business.
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