KARACHI: Early on Saturday, FINCA Microfinance Bank (MFB) and Apna Microfinance Bank (MFB) disclosed that the proposed merger between the two microfinance banks has been shelved. FINCA is now exploring other options and amongst these options are a number of well-known international financial institutions.
Profit reached out to both Apna MFB and FINCA MFB to find out why the two dropped the idea of a merger. We received no response from Apna MFB. However, Samra Noori, Senior Vice President, Head of Marketing, Research & Communications from FINCA Microfinance Bank Limited told Profit that the due diligence was a long and extensive one.
“This was some six-month-long exclusive due diligence which means that we would take a decision after evaluating all aspects. After due diligence was completed, both organisations mutually decided to suspend negotiations and continue to pursue other options with the help of State Bank aggressively for capital raising for both institutions. To be transparent, it (the proposed merger) required us to take more risk without sufficient probability of success given the country’s current economic environment. So we had to take a decision that was in the interest of the organisation and the customers. Hence it was shelved.
During the due diligence process, we realised that this merger would not benefit us. We obviously have to think about the customer. FINCA Microfinance Bank has been the first one to ensure customer protection. We have won an award previously as well. So for us, the customer comes first. (This merger) would not have translated into benefits for customers So we did not want to go ahead with it (merger) for the same reason.
It (due diligence) was a very very thorough exercise. A lot of thought, effort, work and capital has gone into evaluating this merger. So having said that we do have a few options. We are in talks with other entities, which I would not be able to disclose at this point but rest assured, things are coming up.”
Why were the two microfinance banks interested in merger?
Noori told Profit “The reasons for considering the merger were a bigger network, more outreach, and more avenues for the customer. Apna Microfinance Bank did not have a digital financial services wing so they could have added that to their portfolio because we are full-fledged digital financial services (DFS) on the side with the bank. We are dispersing loans through our DFS. We have a mobile wallet called FINCApay. So it could have resulted in greater things but not at the expense of sustainability, profitability and success”.
Apart from that the two microfinance banks had been suffering from capital adequacy issues:
FINCA Microfinance Bank’s financial troubles
In the annual reports of 2021 of FINCA, the auditors raised a red flag by highlighting a “Material Uncertainty relating to Going Concern.” This alarming phrase indicates that the bank is facing a serious problem: it doesn’t have sufficient assets to cover its liabilities.
This concern arose after FINCA MFB incurred a whopping net loss of Rs.1.5 Arab in 2021. The losses arose due to the adverse effects of COVID-19. COVID-19 wreaked havoc, hitting the borrowers hard and making it difficult for them to repay their loans which resulted in a substantial increase in write-offs, and provision against non-performing advances (loans). Their interest income took a hit. The Capital Adequacy Ratio (CAR) dropped.
While the bank managed to meet the CAR regulatory requirements by the end of 2021, there was a looming threat that the threshold might be breached in the next twelve months based on projected results.
The latest period for which FINCA MFB’s financial statements are available is for the first quarter of 2022. The bank hasn’t released the subsequent period’s financial statements, which indicates the bank’s capital inadequacy issue.
Apna Microfinance Bank’s financial troubles
Similarly, the auditors flagged “uncertainty relating to Going Concern” in the annual reports for 2022. Apna bank had incurred a substantial loss for the year amounting to Rs. 4.5 arab, an increase of more than 2 times as compared to its loss in 2021 (2021: Rs. 1.9 arab). The bank had accumulated loss of Rs. 7.4 arab which is an increase by 2.6 times as compared to an accumulated loss in 2021 of Rs. 2.9 arab. Consequently, the bank’s negative net assets (capital) stood at approximately Rs 4 arab.
Like FINCA, Apna bank is struggling in recovering its unsecured non-performing advances (loans) of Rs. approximately 3.5 arab. The Bank’s ability to continue depends on support from its sponsors / potential sponsors.
According to an industry source, the issues with Apna MFB are not new or after-effects of COVID-19. The bank has been plagued with problems since 2014. The bank has been enduring a prolonged struggle for the past 7-8 years and has been actively seeking a buyer as a potential solution.
