Interview: Kabeer Naqvi, President and CEO, U Bank

SADIA KAMRAN: When did U Bank begin operations?
KABEER NAQVI: We began as a small institution called Rozgar in 2003. In 2013 we were bought over by PTCL and our name was changed to U Bank. In 2015, the management changed and I joined in September that year. At the time, our operations were limited; our assets were worth Rs 600 million and our deposits nearly one billion rupees. Today, these numbers have increased to 37 billion rupees (assets) and 55 billion rupees (deposits). The overall capital has increased from one billion rupees in 2015 to Rs 7.5 billion in 2021 and we have expanded our branch network to 201 branches, and are adding 80 more this year.

SK: Who are your target customers?
KN: Individuals and businesses who cannot open a bank account or borrow from a bank due to living in remote locations or the nature of their income – such as farmers. Ultimately, while urban-based retail banking is what conventional banks focus on, we primarily operate in the rural retail banking sphere.

SK: How do you reach out to your rural customers?
KN: Our relationship managers have been trained to treat previously unbanked people with the utmost respect. These are customers who were previously intimidated by conventional banks. We have hired relationship officers from the same communities and are therefore creating jobs in those communities and generating a certain degree of trust among our customers. Our USP is based on devising solutions for the underserved sector. We have increased our customer base by offering uncollateralised loans.

SK: To whom do you provide collateral and uncollateralised loans?
KN: The first segment includes people in the agricultural sector whose ability to repay loans is affected by natural calamities such as floods, droughts, or locust attacks, and the collateral here includes gold or land. To ensure financial sustainability and diversification, we do not limit our lending to them unlike other microfinance banks and provide uncollateralised loans by using income proxies to calculate their creditworthiness and repayment ability.

SK: How do you achieve this?
KN: We go to communities and understand a customer’s worth through factors such as the livestock they own, their shop’s inventory, or the number of their daily customers. All of these factors combined provide us with the picture needed to gauge creditworthiness. We also ensure financial sustainability by investing in several instruments, such as term finance certificates and mutual funds. These investments guarantee a steady stream of return and are unheard of in the microfinance sector.

SK: How does U Bank promote its services?
KN: Through TV, print, and digital. In 2021, we ran ATL and BTL campaigns focusing on the government’s low-cost housing scheme. The response was encouraging given that microfinance banks do not usually spend big on promotions and this was a milestone for us. We just concluded another ATL campaign for our newly introduced Islamic banking services; awareness was a prime driver.

SK: Why does a bank with a branchless banking license have so many brick and mortar branches?
KN: Having a branchless banking system and having physical branches are not mutually exclusive. Digital is the way to go forward, but in a country of 220 million people with a low literacy rate coupled with uneven internet data services outside the metros, brick and mortar branches are essential. We do not have an aversion towards digital. In our branches, we understand the difference between automation and digitisation. As step one, we have tried to automate our loan acquisition process, while our field staff has tablets to record customers’ information. On the back-end, we aim to introduce an AI-based bot that works on a set of algorithms for loan approvals. Furthermore, with automation, we are now able to service customers within a day rather than seven to 10 days, which was the case previously. When AI approval kicks in, this procedure will take less than an hour. Therefore, while we are digitally driven to provide top-of-the-line services to our urban consumers, taking on-board farmers in rural locations such as Chitral requires a brick-and-mortar branch.

SK: Why are U Bank’s interest rates higher than those of conventional banks?
KN: We have received a lot of criticism on this front, whereby people question our 30 to 32% interest rate on loans that cater to the underserved [which is higher than other commercial banks]. However, a farmer usually earns a 100 to 170% profit on his crops, which is why, in terms of value, our rate is not very high. Furthermore, such farmers usually borrow money from other people who charge a rate of 100%. So, although 32% sounds high, our analysis reveals that our customers are happy with our rates. On another note, this interest rate is justified by our collective costs, such as funds and operations, which leave us with very low profit margins. The problem is exacerbated by our ‘unscheduled banks status’ under the Banking Ordinance, which deprives us of the discounts offered by the State Bank of Pakistan (SBP) to commercial banks. However, SBP has been a very receptive partner and is open to creating an enabling environment to support our evolution and we are awaiting scheduled bank status and looking forward to the SBP’s discount windows. Meanwhile, with automation, we aim to bring down our operational costs and are in discussion with the Federal Board of Revenue (FBR) to lower our tax rates as we are working to bank the underserved sector.

SK: What measures are you taking to ensure the future of U Bank?
KN: Recently, we have broken down our bank’s focus into six ‘canvases’ – rural retail, urban retail, Islamic bank, digital bank, corporate banking (SMEs) and treasury/corporate finance. Furthermore, our long-term ambition is to spin out a standalone Islamic microfinance bank, a digital bank, a microinsurance company, a low-cost housing company, an asset management company and a real estate investment trust. We are in talks with relevant institutions to grant us scheduled bank status and this will open many windows, as once we become a scheduled bank, we aim to collaborate with stakeholders to shorten the remittance cycles and make them more efficient. Furthermore, we want to introduce not just forex but retail and trade services for our rural customers. Ultimately, we need creative solutions to solve Pakistan’s problems. We need more microfinance banks with bigger sizes and outreach to serve those parts of Pakistan that are waiting to be banked.

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