When it comes to foreign investments, Pakistan has a rather limited pool of suitors. Early on, it was the US, followed by a brief affair with the Soviet Union. Eventually, the Gulf Cooperation Council members entered the scene and opened a new avenue for capital. But everything was overshadowed by China’s rise, particularly after the Belt and Road Initiative.

Egypt typically doesn’t feature on that list, but in the last couple of years, it is emerging as a sporadic yet prominent name in the financial services space. EFG Hermes has been in the market for a long time and recently merged with Intermarket Securities. Paymob too became noticeable in point of sale with its aggressive acquiring before eventually cutting back.

Last year in March, Egypt’s MNT-Halan also announced its entry with acquisition of Advans Pakistan. The fintech unicorn has raised more than $677 million through a mix of debt and equity, which accounts for around a quarter of the country’s total capital raised since 2018.

In a little over five years, MNT-Halan has emerged as the largest non-bank lender to the unbanked in Egypt, boasting over a million monthly active customers with a 21.7 per cent market share. As of 2023, it had disbursed $4.4 billion in loans and possesses licenses from the Financial Regulatory Authority for consumer and nano finance, in addition to independent electronic wallets from the central bank.

The fintech’s acquisition of Advans gives it access to an existing customer base, loan book, branch network and a license with a broad mandate

With the home market covered, MNT-Halan now wants to replicate the same success overseas, and Pakistan was the first geography. Advans Pakistan gives them access to an existing customer base, loan book, staff, and a branch network, in addition to a license with a broad mandate.

From that perspective, the acquisition appears quite promising. Throughout the last decade, microfinance banks have witnessed a significant surge in their deposit base, both in value and in the number of customers. Advans Pakistan is no exception, showing a consistent rise in total deposits every quarter. The bank has reported an average 14pc growth in the total value of deposits and 6.5pc in the number of depositors.

This was primarily on the back of fixed and savings instruments, which collectively accounted for 98.4pc of the overall deposit mix in 2023, up from 96.7pc in the previous year. As of the end of 2023, gross advances slipped 7.24pc, driven by an economic slowdown and elevated benchmark rates, while active borrowers were down 9.3pc to 17,925.

A large portion of its book is made up of unsecured borrowing, amounting to Rs3.1bn and making up 97.1pc of the total portfolio for 2023. This poses substantial credit risk and the potential for future non-performing loans (NPLs).

While these numbers paint a promising picture for Advans, the full financial story is a mix of challenges and opportunities. In 2023, Advans’ total markup income surged to Rs1.7bn from Rs1.3bn in 2022, driven by a 5pc higher yield on earning assets due to elevated benchmark rates.

However, the cost of funding rose by eight percentage points to 22.6pc, compressing the spread despite a slight increase in net interest earned.

Although non-markup income increased, it couldn’t offset the rise in corresponding expenses, resulting in a net loss of Rs178m in Q1 2024 and pushing accumulated losses to Rs1.26bn.

With just 20 branches and a limited workforce, the small size of Advans may actually be an asset to MNT-Halan, which can potentially start from scratch

These figures reflect profitability struggles following the 2022 floods in Sindh, which impaired loan repayments and caused non-performing advances to rise by an average of 12pc quarter on quarter. While the infection ratio shows slight improvement, the outlook remains uncertain.

Bad debts impacted the Capital Adequacy Ratio (CAR), which fell to 10.93pc by Q1 2024 — below the required 15pc but still above the industry’s 6pc. In March 2023, Advans had appealed to the State Bank of Pakistan for a CAR compliance waiver, but the request was denied, forcing sponsors to inject equity: Rs188.5m on Aug 15, 2023, and Rs132m on Sept 12, 2023.

According to its April 2024 credit rating report, new shareholders plan to invest Rs1-1.5bn to bolster capital buffers, indicating ongoing efforts to stabilise the bank’s financial health.

But why is a unicorn taking over a struggling bank that doesn’t even meet the minimum capital requirements? License is obviously a big explanation, but there are 10 more micro finance banks, usually with far bigger scale of operations.

That small size actually might be an asset for MNT-Halan.

With just 20 branches and a limited workforce, Advans is the smallest player in the industry and thus offers a chance to start things from almost scratch, potentially reducing restructuring costs. But apparently, the new management wants to further expand the physical footprint.

“In Pakistan, we’ll have a hybrid model. We will transfer a lot of our backend technology and app to provide more services and a better experience to our customers. Simultaneously, we will expand our branch network to be closer to our customers for better know-your-customer and to get wet signatures when we need to,” said a company spokesperson in response to Dawn’s questions.

For a fintech player, this might seem counterintuitive at first but on closer inspection, does make sense. After all, branched accounts on average have 39 times the deposits compared to mobile wallets. But the bigger question is how would MNT-Halan approach a brick-and-mortar business, considering it doesn’t have much experience in this regard.

The second problem relates to the inefficiencies at Advans: it has the third highest operating expenses to gross loan portfolio (36pc), almost twice the industry median.

On top of it, there are serious questions looming around the health of the industry microfinance banks have been posting consistent losses and face capitalisation issues. Building a solid business, with attractive dollarised returns, is tricky in such an environment. But then, operating in Egypt has probably already prepared MNT-Halan for tough macros.

Mutaher Khan is the co-founder of Data Darbar and Muhammad Hamza is an intern at Data Darbar

Published in Dawn, The Business and Finance Weekly, August 5th, 2024