Interview with Kabeer Naqvi — President & CEO, U Microfinance Bank
U Microfinance Bank Ltd. (U Bank) has been witnessed to be one of the most progressive and fast-growing microfinance banks in Pakistan. The bank is a wholly-owned subsidiary of Pakistan Telecommunication Company Limited (PTCL) – e& Group (previously known as Etisalat Company). It has a vast network of branches across the rural and urban areas of Pakistan, offering a wide range of microfinance loans, deposit products, and branchless banking solutions. U Bank is dedicated to its mission of financial inclusion of the masses, under the strong leadership of its President & CEO – Kabeer Naqvi. Naqvi has been with U Microfinance Bank since Sep 2015 and has been instrumental in the turnaround of the bank. He has more than 21 years of work experience to his name and continues to lead U Bank with his vigor, drive, and vision. He represents a new breed of bankers who have managed to push the evolution of banking while staying true to the spirit of serving the underserved and excluded population of the country. Following are the scripts from Kabeer Naqvi’s exclusive interview with Pakistan & Gulf Economist.
PAGE: There are around a dozen microfinance banks operating in Pakistan. What distinguishes U Bank from other players?
Kabeer Naqvi: Being a telecom-owned bank, we were expected to focus on mobile financial services and digital banking instead of core microfinance. However, our approach towards our customers is different, keeping in mind the demographics we serve and our vision of financial inclusion. We still are a country where a huge majority of the population remains unbanked and as a microfinance bank, we play a key role in financially uplifting the populace, banking the unbanked, and socially including them. We recently reached a Gross Loan Portfolio of PKR 50 billion and one can only imagine the immense hard work that must have gone into creating this portfolio on small ticket-sized loans. We serve millions of Pakistanis through our 300+ nationwide branches which make us the largest in our space geographically. We provide financial services on both conventional and Islamic modes and are heavily investing in our technological infrastructure to offer improved mobile financial services. As such, we offer diverse services that are atypical to microfinance banks, and that is what makes us unique in our industry.
- U Microfinance Bank is playing a key role in financial and social inclusion
- The bank is adopting a ‘Phygital’ approach to ensure financial literacy and maximize outreach
- U Bank offers conventional, Islamic, and digital banking all under one roof
- Microfinance banks in Pakistan are working to economically enable the lower-income groups
PAGE: At present every institution is talking about digitalization. What is U Bank’s approach toward digitalization?
Kabeer Naqvi: It is widely believed that going digital improves an organization’s valuation. While this is a valid point, our approach toward it is different. Our customer is a landless farmer without access to high-functioning digital devices and the internet. We can talk about inclusion through technology while sitting in urban cities, but it is necessary to keep in mind the limitations of digital infrastructure and connectivity in remote areas. Staying true to our vision of inclusion, we have opted for a multi-pronged ‘Phygital’ approach – where we continue to maintain our focus on physical branches’ expansion while developing our digital infrastructure to maximize our outreach. Our objective is to first bring our customers onto the network through UPaisa or USSD, and then provide enough literacy for them to adopt digital payments and switch to savings. Vis-à-vis the industry approach is to encourage digital lending, acquiring credit at U Bank comes at a much later stage, once our customers have gotten accustomed to the digital environment. We believe that ultimately human intervention may be necessary for credit purposes, despite a technological transformation around the world.
PAGE: In the face of financial exclusion, lack of literacy, and limited reach, what is your approach to reaching rural masses?
Kabeer Naqvi: This is exactly what makes us different from commercial banks. We go to the last mile locations to open up our branches to reach remote communities. We hire locally from within their neighborhoods and generate employment for them. We have introduced conducive systems to protect vulnerable segments and secure them against the risk of exploitation. One of the core values at U Bank is ethics and we stand strong by it across our network to ensure our client’s financial and digital literacy, while helping them improve their income generation. U Bank strongly believes that financial inclusion is not possible without social inclusion.
PAGE: What has your learning curve been like after working with the masses and how has it been able to better serve those who are vulnerable or deprived in society?
Kabeer Naqvi: If you look at the poverty pyramid, a majority of the microfinance banks are working to serve the ‘economically-enabled poor’ as termed by the regulatory authority. Although I do not prefer using the term ‘poor’, this level of the pyramid includes individuals who can be given financing as working capital for a small business. This is a huge stratum, for whom we work to achieve improved income generation. This can be seen as a step in a value chain — smaller NGOs and financial entities help out the most vulnerable segments and graduate them towards us, where we economically enable them and bring them into an organized system. Once they become used to benefiting from the documented system, they can develop into MSMEs and also benefit eventually from commercial banks. Let me also confess that it is not an easy task — we have burnt our fingers and called ourselves a battle-hardened team. But we have learned over time and are moving towards the next orbit.
PAGE: How has the success journey been and have you been able to achieve your targets?
Kabeer Naqvi: There are various parameters for measuring success. Over almost a decade, we have grown from being the smallest to one of the largest microfinance banks in the country. Our CAGR is in double digits and we have maintained that over time. With the kind of client base we have collected, the services we have offered, and the penetration we have achieved in rural and urban areas, I believe we have done fairly well. We have set our own standards and kept on raising the bar. However, a lot more needs to be done. The size of the pie is very big, and there’s ample space to deepen the overall penetration of microfinance banks in Pakistan.
PAGE: What has the overall rate of delinquency been like?
Kabeer Naqvi: From a distance, the general perception is that the rate of delinquency or non-performing loans will be high in low-income groups. However, the reality is quite opposite. Interestingly, when a loan is given out to low-income groups on the basis of social collateral in a village or a peri-urban area where their own relatives or loved ones act as guarantors for them; there is social pressure that acts as a way for them to ensure repayments. They are less likely to default on them, and their delinquency rates were around 2-2.5% before the pandemic hit. Historically, the defaults are mostly circumstantial, as in cases of natural catastrophes, floods, locust attacks, or similar incidents. Unfortunately, in recent times, the floods have impacted delinquency levels for banks. However, I can confidently say that when things normalize, the delinquency rates will lower significantly since we have seen excellent repayment behavior from this income stratum over the years.
PAGE: What is the difference between the business strategy of commercial banks and microfinance banks?
Kabeer Naqvi: The DNA composition of conventional and microfinance banks is very different. The difference lies in the mission and risk appetite of both banks. Our mission is primarily to work with a segment of society, amongst others, that is not catered to by high-street commercial banks. Our way of business includes remote, far-flung areas where we aim to provide financial services. So, what is mostly considered no-go areas for commercial banks are our to-go areas? Conventional banks frequently lend against collateral, while we as microfinance banks provide the option to use the borrower’s income-generating capacity as a proxy for tangible collateral. For example, if a farmer applies for a loan, our relationship officer goes to the farmer’s premises to develop his cash flows, assess his production in terms of crop harvest or livestock, and create an income proxy for him. The verification officer independently goes to verify and approve the loan. This is an extensive operating model with high costs associated with it against small ticket-sized loans, which goes against the objective of a commercial bank, and hence not every institution feels comfortable catering to the needs of this niche.
PAGE: How big is your Islamic banking operation?
Kabeer Naqvi: U Bank established a dedicated Islamic banking division last year that promises to serve people by combining banking with Islamic values. Within the confines of Shari’ah, we are offering enhanced financial solutions developed under the guidance of a dedicated Shari’ah Advisor. We received our license to pilot in 2021 and commercially launched it in 2022 with 30 fully-functional branches across Pakistan. We intend to take this number up to 80 branches by the end of 2023.
PAGE: How has the banking sector planned on helping those affected by the floods?
Kabeer Naqvi: The State Bank of Pakistan has introduced specific beneficial schemes for the population affected by the floods in Pakistan in the past year. These schemes involve the entire banking sector, including microfinance banks, and include interest-free loans aimed towards rehabilitating people with credit guarantees of up to 50 percent borne by the government. This way, SBP is encouraging banks not to shy away from lending to people who are in distress in current times and is enabling the general populace to continue to receive lending, which is an appreciative effort.