SME Banking Report: Kushhali Microfinance Bank

Founded in 2000 as part of the Government of Islamic Republic of Pakistan's Poverty Reduction Strategy and its Microfinance Sector Development Program, the bank has an extensive branch network across the country. Its board comprises seven members, including leading commercial bankers, fund managers, and microfinance experts from across the globe. The bank's mandate remains to retail microfinance services, but it recently started an SME pilot and launched SME lending in 2014. To fill the "missing middle" gap, Khushhali Microfinance Bank introduced the small enterprise product, Khushhali Sarmaya, with a maximum loan amount of PKR 500,000, as per the established Prudential Regulations for Microfinance Banks. The high demand for small enterprise loans has led to increased competition in the SME market segment, with more microfinance banks entering the sector. Khushhali Microfinance Bank has obtained a USD 10 million USAID DCA credit guarantee facility and has utilized 50% of that facility as of August 2016. The bank's SME sector makes up 3% of the entire loan portfolio, with a low PAR (past due amount) of 1.55% as of September 30, 2016, and minimal losses of 0.003%. As of September 2016, the bank had 5,676 active SME loans valued at PKR 754 million, with an average loan size of PKR 250,000 and an average loan term of 14 months. A SWOT analysis was conducted to identify the bank's strengths, weaknesses, opportunities, and threats in the SME banking arena. The analysis revealed several strengths, including the bank's name and reputation, support for SME from senior management, availability of ATM machines at its branches, established SME department, good strategic development and performance management, and loan officer training programs. However, the analysis also identified several weaknesses, including the need to introduce SME loan products instead of using a generic term, create a Profit & Loss statement for the SME sector, improve the turnaround time for new and repeat borrowers, and continue the procurement and implementation of a core banking system. The report provides a series of recommendations to Khushhali Microfinance Bank to help it construct and strengthen its SME banking offering, including the introduction of new SME loan products, improvement of the loan processing time, and implementation of a core banking system. The bank's SME clients typically have less than 10 employees and are mostly in the informal sector. The SE sector actors in Pakistan are 48.3% in the manufacturing sector, 6.7% in the trade sector, 44.4% in services, and 0.6% in agri/other sector. The market size of Pakistan for micro enterprises is 2,884,151, representing a significant market. SMEs constitute nearly 90% of all the enterprises in Pakistan, employ 80% of the non-agricultural labor force, and represent approximately 40% of the annual GDP.