Money: Describe your career prior to the founding of Tameer Bank.
NADEEM HUSSAIN: I spent 28 years with Citigroup, working in nine different countries, in several different functions; I worked in Investment Banking, Corporate Banking, Risk Management, Treasury, Global Cash Management, Consumer Banking, and Insurance. I quit Citigroup in August of 2005 to start Tameer Bank in Pakistan. I spent 28 years working for a world class organization, I personally benefited a lot from it, the corporation benefited from my management and the deals that were made, but it was clear that Pakistan did not benefit at all, other than for the five years I spent as the consumer bank head where I spearheaded the launch of the consumer industry in Pakistan. After this long and productive career I thought it was time to return to Pakistan and to do something that would allow me to use my experience from working in various countries and in different functions , and see what I could do to provide access to capital to the un-banked in Pakistan.
Money: What motivated you to change the direction of your career?
NADEEM HUSSAIN: The primary motivation, was to try and create an institution that would focus only on the needs of the un-banked in Pakistan. The secondary motivation was to create a world class Pakistani financial Institution. I wanted to create something that would be counted among the top five organizations in the world. My background is in finance and clearly, working in a commercial bank here would have enhanced my own balance sheet, but it would not have helped developed the concept with me and left the successful careers to start Tameer with me.
Money: What did you find in your research?
NADEEM HUSSAIN: Three things became very apparent to me; the first being that the bulk of Pakistan’s population is disenfranchised because they lack access to basic debt. There are 34 commercial banks in Pakistan and they lend to only 4 million people in the middle to higher income brackets. The entire microfinance industry now lends to a million people. So in a country of 160 million, only 5 million people have access to formal credit and the rest are at the mercy of informal credit. There is a huge gap in the provision of basic financial services to the bulk of the population, urban or rural, whether it is providing loans, savings, insurance, or savings products. Clearly there was a strong need.
Secondly, I looked at the success of microfinance banking at the global level and examined what it would take for us to get to the top five. You see, if I were to open a commercial bank or an Islamic bank, it would be much, much more difficult to be among the top five, given that it is a mature industry, people have deep pockets, and there are established brands. Comparing microfinance to commercial banking, with microfinance being a relatively new industry, there were only about 10 names that you could look at that are highly successful. So we would have to create a model over the next five years to be a part of not the top 10, but part of the top five.
Although I did not know anything about micro finance from a practical perspective, never having worked in this field, over half of my experience with Citigroup was in consumer banking. What I discovered was that over half of the disciplines required in consumer banking lend itself to microfinance. There is the management of large sales forces on a variable cost basis, managing small ticket items on a high volume basis, using MIS in unit cost structures, so those disciplines led me to believe that it was possible to make a transition. r It was doable, so long as we were willing to learn! There continues to be a lot of learning, I am always learning, and my team is always learning.
Lastly, I learned as I was researching that an impact would be made in the lives of the people of Pakistan and that we would be creating a legacy and a brand. Other than financial returns, we would be making a social contribution and become a benchmark for not only Pakistani microfinance institutions, but for institutions overseas as well.
Money: Other than catering to a different and much larger demographic, what is it that truly sets micro financing apart from consumer/ conventional banking?
NADEEM HUSSAIN: The differences between microfinance and consumer banking are three-fold. First, the amount of loan you give is much smaller than the amount of loan you can potentially give in consumer banking. For example, in consumer banking the SBP says that you can give up to a million rupees on an unsecured basis to an individual. The microfinance ordinance requires that you only give the maximum of Rs. 100,000, and 20 percent of your portfolio can amount up to Rs. 150,000. So the amount of the loan is small because you are focusing on the lower end of the customers whose needs are not million or half-million rupees, but are Rs. 10,000, to Rs. 100,000.
The second big difference is that there is no collateral, it is all on a cash flow basis. So you go and assess the income paying ability of the customer, by reconstructing their income and expenses, because they do not have any audited or recorded financials available and they are not listed with the credit bureau, so it is all about how accurate your income assessment is..
Here, I would like explain the two principle methodologies used in microfinance for extending loans. There is the Grameen model that is also referred to as group lending where you get a group of people together and they cross guarantee each others obligations. So while your loan is to the individual the group is responsible for its repayment. In cross guaranteeing, the group has to pitch in together to help make the payment if any member of the group is unable to make their repayment. That works well in the rural areas and many banks and NGOs are using it. Then you have the individual lending model that we, Tameer Bank, use. We assess the income repaying ability of the individual without there being any group guarantee. Hence there is higher risk. In consumer banking, typically loans are made to salaried people and it is easier to lend to these people. In microfinance banking, 98 percent of our clients are entrepreneurs who are self employed.
So the difference in our target customers, the amount we lend, and finally, the third difference is that the loan tenure is typically 12 months. This is because our customers’ cash flow is on a monthly basis, unless you go into the rural areas where some loans are repaid in six months because they are tied in with the crop harvesting cycle. However in urban micro financing, we have monthly repayments. If you take a loan today, then next month you will start repaying it.
Money: Consumer banking has always been present in Pakistan, but it was only recently that it gained so much ground. Do you think microfinance banking will take just as long to experience growth?
NADEEM HUSSAIN: Microfinance banking is a much more difficult proposition than consumer banking therefore growth for microfinance banking will take a longer time. The institutions entering microfinance banking have two bottom line objectives. One, they want financial return and two, they also want to make an impact socially by empowering people outside the banking net. Commercial banks do not have to worry about a second bottom-line objective, all they need to do is pay their investors and make profits, along with doing a few community service projects every now and then. There are very few institutions that have this dual-bottom line..
The second reason why growth in microfinance banking will take time is because it is very difficult to be financially and operationally sustainable in micro financing because you have to create a cost structure that allows you to give an average loan of about Rs. 30,000 and still be financially sustainable. You have to keep in mind that a lot of the costs of a microfinance bank are similar to those of a commercial bank. We run a head office, we have to pay rent for offices and branches, we have to pay market rates for the people we hire in our head office, we need to create a technology platform- our branches are real-time online, we use biometric ATMs. So you can see that though not all, but most of our costs are similar. Now look at the revenue; a commercial bank gives a Rs. 30 million loan, and think of the revenue associated with that loan, whereas in Tameer Bank, the average is just Rs. 30,000. How many loans like this do we have to give to match the commercial bank? We have to have a huge number of loans and customers to get revenue, and therefore we have to create a cost structure where we am getting a very small amount of revenue from an individual loan, and as we increase the number of loans, our costs cannot grow in tandem with that. That is why many of the microfinance banks in Pakistan, even after four, five years of operations are still making marginal profits. In microfinance banking, you have to be prepared to get financial returns much later, while also creating a business model from scratch. Once you do that, you can get financial and social success.
Money: What role do you see Tameer Bank playing in helping Pakistan achieve the UN’s Millennium Development Goals?
NADEEM HUSSAIN: Firstly, poverty cannot be reduced by micro finance alone, there are various other disciplines that you need to provide; health, and education are equally important. Microfinance is just one of the tools that can be used for poverty reduction. The industry needs to have 10-12 million customers if we plan to make a dent in poverty. The industry’s goal is to reach 10 million customers in ten years. Tameer Bank in ten years intends to have in excess of 3 million active loan customers.
Money: Understanding that you have a cost structure unlike the commercial banks, the advertising and marketing budgets for Tameer Bank must be comparatively smaller. How do you plan to attract so many customers in that time?
NADEEM HUSSAIN: We need to market, we need to advertise, but our customers and our medium of advertising are very different from those of a commercial bank. A commercial bank will advertise on national television and national newspapers. We need to do that as well, but we have to be more localized. Our customers and our 16 branches are in the periphery of Karachi; we have branches in SITE, Lyari, Baldia Town, Orangi, Korangi, Malir, Landhi.,North Karachi, Godra, Manzoor Colony, Taiser Town and Liaqatabad. We are where the lower income groups live and often work. These areas are like mini-cities, Orangi has a population of two million, and so we advertise locally. We get on FM 107, we advertise locally on cable, we advertise in the local dailies, and we put banners up at our branches. The amount of money we spend on advertising is lower, but it is effective for us. We also rely on and can count on word-of-mouth advertising. We hire our branch personnel from the community and our aim is to work with the community.
Money: Do you face issues with hiring and retaining quality employees, because of your branch locations and smaller budgets?
NADEEM HUSSAIN: We do not hire graduates from the top-tier schools. The bulk of our staff is from the local communities and they are graduates from the local colleges. Without any previous job experience, we hire them and train them and continue to give them on-the-job training to make them into good microfinance officers. My challenge is to continue finding good people from the community. We have a handful of people with foreign degrees and educations from the top schools of Pakistan, but they work in the head office. We are not competing with the commercial banks to hire from the high-end of the talent pool. Our aim is to hire from within the community and to train them to be effective microfinance officers.
There is the risk of losing employees once they have gained experience, to the commercial banks that offer higher salaries. To mitigate this, we have retention programs. We have training programs more often for our employees than the other banks, we offer more recognition to our employees, we make employees permanent sooner than the commercial banks, provided the employee has demonstrated potential. Our board recently approved the employee stock option, and we will be giving out 300 thousand shares to our employees.
We want our employees to know and feel that they are working in an institution that is transparent, that is community oriented, that is socially motivated, and that they partially own.