Someone is putting their money to good use. Last week, the country’s largest bank by assets, Habib Bank Limited (HBL), announced that it was looking to acquire “significant shareholding” in First Microfinance Bank Limited (FMBL). Following SBP’s approval, HBL has been conducting necessary due diligence. This follows HBL’s ongoing quest to absorb Barclays Pakistan’s operations.
Mergers and acquisitions usually happen for one of two reasons: long-term strategic value or short-term cost savings. In this case, HBL perhaps finds strategic value in gaining major stake in FMBL. But in strategic acquisitions, the usually smaller target firm ought to have some really hot product or service, which the acquirer can put to better use through its sales and marketing muscle.
In a crowded microfinance sector, where there are over fifty microfinance providers (MFPs), FMBL stands out, owing to its healthy market share. As per industry data compiled by the Pakistan Microfinance Network, FMBL was operating in 52 out of 94 districts reached by the sector, as of December end. It is the fifth largest micro-lender, staking a 7.6 percent market share in the sector’s gross loan portfolio of Rs66.7 billion as of December 2014.
Besides, FMBL had a 20.1 percent share in sector’s total savings – making it the second largest. It is the fourth-largest micro-insurer, underwriting some Rs5.38 billion in policies, or 8.9 percent of the market.
The move makes strategic sense. HBL is already a branchless banking operator, with its HBL Express service. But the acquisition would allow it to complement its financial expertise with some decent micro-lending footprint on the ground. FMBL is said to have formidable microfinance operations in Gilgit-Baltistan and Chitral in Khyber Pakhtunkhwa, besides growing portfolios in Punjab and Sindh.
HBL’s stated objective is to pursue financial inclusion by “serving customers who are in the low-income bracket, by creating a differentiated and cost-effective model”. FMBL is already doing that, and it happens to be HBL’s relative. HBL’s controlling interests (51%) rest with the Aga Khan Fund for Economic Development. FMBL’s controlling interests (42%) are with the Aga Khan Agency for Microfinance.
The two agencies, along with nine other agencies and institutions are run by the Aga Khan Development Network, which has operations in about 24 countries including Afghanistan, Bangladesh, India and Pakistan.
The benefits may flow both ways. While HBL may benefit from FMBL’s institutional memory and community presence built over last 13 years, FMBL will be able to tap the coffers of HBL to better fund its microfinance operations. HBL will now have a better view of the opportunities and FMBL will have a banker who will listen. What kind of an organization structure evolves remains to be seen.
We may hear more about this impending transaction after HBL’s AGM taking place in Islamabad this Friday, March 27. As per its 2014 annual report, HBL intends to spend up to Rs2 billion in acquiring majority stake in FMBL over a period of three years. A break-up value of Rs8.16 per share is also mentioned, possibly serving as an entry point.
Should this deal go through, it will be the first instance when a large Pakistani commercial bank showed this much zeal in microfinance. Previously, telcos have acquired microfinance banks, but it seemed that was more out of a formality to get the branchless banking license than a concern for microfinance in the country.
HBL can show other large banks the way here. The microfinance sector is under-capitalized, with low bank financing often cited as a bottleneck to the sector’s growth. Despite the successes garnered over the last decade, MFPs are catering just about 10 percent of the 30 million potential micro-borrowers. If HBL’s plan to acquire FMBL’s majority shareholding is indeed more than the usual equity injections it has been making in its associates and subsidiaries lately, it must be appreciated and wished well!
Source: Business Recorder
