Case

From Kashf Foundation to Kashf Asian Journal of Management Cases

14(2) 94–114

Microfinance Bank—Changing © 2017 Lahore University of

Management Sciences
SAGE Publications
Organizational Identities sagepub.in/home.nav
DOI: 10.1177/0972820117713595
http://ajc.sagepub.com

Ghazal M. Zulfiqar1

Abstract
This case documents the challenges faced by the Kashf Microfinance Bank (KMFB) in 2012, when it
was a relatively new entrant in a financial industry established by the 2001 Microfinance Institutions
Ordinance. The case documents the difficulties KMFB faced in establishing itself as a microfinance bank,
moved away from the unregulated NGO sector where its parent company, Kashf Foundation, was
situated. As a microfinance bank KMFB faced the simultaneous challenge of surviving the start-up stage
and adapting to the stringent banking regulations placed on it by the State Bank of Pakistan (SBP). The
latter required learning to strike a balance between the sometimes conflicting banking and development
institutional logics, a typical problem for hybrid institutions with a social mission. As KFMB grappled
with trying to meet the SBP’s requirements on capital adequacy, it faced a repayment crisis originating
from its parent company, wiping out a significant portion of its equity. The case focus is on a decision
KMFB’s board must take, regarding whether or not to invite a new majority shareholder to bring the
Bank out of the red. This includes the decision criteria for choosing a shareholder that will uphold
KMFB’s mission of financial inclusion.

Keywords
Microfinance, NGOs, Banks, Financial Inclusion, Organizational Change, Institutional Logic, Hybrids

Discussion Questions
1. Analyze the difficulties institutions like Kashf Microfinance Bank face in moving from the NGO
realm to the banking realm, while maintaining their social mission.
2. What steps can Kashf Bank take in order to strengthen its organizational capability after moving
from an NGO to a banking status?
3. Evaluate Kashf Microfinance Bank’s position in light of its external environment and consider
whether it could have steered its organizational course any differently to avoid the situation it
found itself in late 2012.

1
Suleman Dawood School of Business, Lahore University of Management Sciences, Lahore, Pakistan.

Corresponding author:
Ghazal M. Zulfiqar, Suleman Dawood School of Business, Lahore University of Management Sciences, Lahore, Pakistan.
E-mail: ghazal.zulfiqar@lums.edu.pk
Zulfiqar 95

4. What are the factors Mudassar Aqil, the CEO of Kashf Mirofinance Bank, should consider in
choosing between the investors the Bank has been approached by? What should be his final rec-
ommendation to the Board?

On a wintry evening in late 2012, Mudassar Aqil sat in his office reading yet another State Bank of
Pakistan (SBP) inquiry directed at Kashf Microfinance Bank, the institution for which he was the CEO.
The bank had been established in 2008 with an initial paid up capital of PKR750 million provided by
Kashf Foundation, an internationally celebrated NGO microfinance institution (MFI) with a strong brand
presence in Pakistan. Aqil’s mind was increasingly occupied by thoughts of the bank’s current dismal
financial statements (see Exhibits 1 and 2). He knew he had tough choices ahead as he prepared for a
meeting with his board of directors.
In November 2010, the SBP had announced an increase in the minimum capital requirement (MCR)
for microfinance banks (MFBs), from PKR500 million to PKR1 billion. All MFBs operating at the national
level, such as Kashf Bank, had to comply with these regulations by December 2013. However, before
reaching this target, the MFBs were expected to raise their capital in order to meet an annual target of
PKR600 million by December 2011, PKR800 million by December 2012 and finally PKR1 billion by
December 2013.
These regulations hit Kashf Bank hard, since two-thirds of its initial equity of PKR750 million had
already been wiped out in the years since it began operations in 2008. As a direct result of this, the country’s
premier credit rating agency had just intimated Kashf Bank that it was dangerously close to being down-
graded to non-investment grade. For a deposit taking entity, this could well be the final nail in the coffin.
In 2012, Kashf Bank was barely four years old, and was trying its best to stay afloat in an industry
created by the Microfinance Institutions Ordinance just eleven years ago. How would the bank recover
from its balance sheet crisis, with the State Bank demanding answers on one hand and its own sharehold-
ers raising alarm about the looming threat of a possible downgrade on the other? Were there any realistic
options for a fresh injection of equity that would maintain the original board of directors’ hold over the
bank and Aqil’s own position as its chief executive officer? Or would there have to be a sell-out?
The bank had been approached by a few interested buyers who were attracted by Kashf’s brand name
and who wanted to acquire a majority shareholding. One of these was a telecommunications company
that wanted to explore branchless banking opportunities by taking over a local MFB. Another was a
consortium of local investors.  In purely financial terms, both offers would substantially improve the
bank’s balance sheet and pull it out of the red. There was also the international microfinance foundation,
that is, Foundation for International Community Assistance (FINCA). Although as an unfamiliar name
in the Pakistani market, it possessed solid credentials and was a widely respected brand in the inter-
national community.
Kashf Bank’s board of directors had to decide how to balance financial considerations with the social
and development mission of their institution when choosing between these investors—if they decided to
go the buyout route to bolster the bank’s equity position. This was a constant tension in double bottom-
line institutions like Kashf Bank, which had to maintain their financially viable commercial status while
meeting the industry’s development mission of providing access to finance to the country’s unbanked
population of more than 150 million.

The Microfinance Landscape and the Embeddedness

of Informal Finance
Microcredit was popularized by Muhammad Yunus in the 1970s as a tool to alleviate poverty and expand
access to credit in Bangladesh. By the 1980s, microcredit had garnered worldwide support. The United
96 Asian Journal of Management Cases 14(2)

Nations, recognizing its potential for energizing developing economies, declared 2005 as the year of
microcredit and Muhammad Yunus received the Nobel Peace Prize in 2006.
In Pakistan, microcredit was introduced in the 1980s by two NGOs—the Aga Khan Rural Support
Programme (AKRSP) and the Orangi Pilot Project (OPP) (Hasan & Raza, 2011; Rauf & Mahmood,
2009). Following their success, several rural support programmes (RSPs) were established across the
country, which offered microcredit to small farmers and owners of livestock (Rural Support Programme
Network, 2011). In 1996, the Pakistan Poverty Alleviation Fund (PPAF) was established by the World
Bank, as a wholesaler of funds on soft terms to such institutions.
Exhibit 3 depicts how the sector evolved in Pakistan. It shows a general move away from community
development NGOs towards bank-led microcredit. Similarly, emphasis on poverty alleviation was
replaced by a profit-oriented approach. Finally, specialized institutions had broadened their product
portfolio by introducing micro-savings and micro-insurance, so now the intervention was referred to
collectively as microfinance, rather than just microcredit.
Despite these developments, the average Pakistani household remained excluded from the formal
financial system—which primarily meant commercial banks—preferring to keep savings at home and
borrowing from family or friends in times of need. According to the World Bank (2015), only 10 per cent
of the population had a formal bank account and only 1.56 per cent took out commercial bank loans in a
given year. In terms of the full range of financial services, only 14 per cent of Pakistanis could claim
financial access, as opposed to 32 per cent of Bangladeshis, 48 per cent of Indians and 59 per cent of
Sri Lankans (Nenova, Niang & Ahmad, 2009).
The gender gap in access to finance in Pakistan was the largest in South Asia, with 41 per cent of men
but only 25 per cent of women owning a bank account (Demirguc-Kunt, Klapper & Singe, 2013).
In Pakistan, the disparity was much worse, with 21.1 per cent of men and only 5.5 per cent of women
having access to banking services. Despite its growing presence, the microfinance sector in 2012 barely
served 10 per cent of the total population excluded from formal finance (MicroWatch, 2012), as opposed
to more than a quarter of the population in other South Asian countries such as Bangladesh and India
(Nenova et al., 2009). Additionally, most institutions, with the exception of the RSPs, chose to locate in
urban areas because the cost of operations was lower there, leaving large swathes of the rural population
without access to formal finance.
Access to finance remained a serious issue for the rural population, despite the fact that agriculture
directly accounted for 21 per cent of the nation’s GDP, and also contributed indirectly by providing raw
material to agro-based local businesses. Agriculture employed about 45 per cent of the nation’s total
labour force. However, yields had been stagnating for the past few years and one reason for this was the
unavailability of formal credit to rural areas. In 2011, lending to the agricultural sector made up only
10 per cent of the total banking loans. Given that by 2012 the penetration rate of microfinance was barely
10 per cent and the majority of institutions preferred to stick to urban markets, the only recourse for the
farm community was informal credit.
Informal suppliers of credit were locally referred to as arthis. These were lenders deeply embedded
within the agricultural supply chain, and had developed products tailored around the cash strapped needs
of their clients. For instance, the life of the loan was designed around the crop cycle. In case of a crisis,
the farmer was allowed to rollover the loan and loans were given out on personal guarantees, rather than
collateral such as land title (which was what commercial banks relied on when extending farm loans).
Unsurprisingly then, a recent rural survey indicated that small- and medium-sized farm owners preferred
arthi loans to bank loans. Of course, while microfinance rates hovered in the mid-thirty range, the arthi
charged rates of interest as high as 81 per cent per annum (see Exhibit 4 for a comparison) and imposed
binding contracts on the farmer to sell produce through him, so that his cash flows remained under the
arthi’s control (Haq et al., 2013).
Zulfiqar 97

The term arthi was an umbrella term that covered several different types of informal actors who pro-
vided credit and other services to the farmer. The first of these was the commission agent, known locally
as the kaccha arthi, who acted as the farmer’s bank, providing credit for the purchase of inputs and other
loans to help tide the farmer over dry periods. The second was the wholesaler, known as the pukka arthi.
The third was the beopari or the village level trader who bought the produce from the kaccha arthi and
sold to the pukka arthi and often provided credit for input purchase too. The fourth was the input dealer
from whom the farmer may purchase seeds and fertilizer either with cash or credit. Each one of these
actors played an important role in the agricultural landscape of rural Pakistan, particularly in the near
complete absence of the state and the banking sector (Haq et al., 2013).
With this context in mind, we return our focus to Kashf.

Kashf Foundation—Pakistan’s First Dedicated

Microfinance Institution
The establishment of Kashf Foundation was an important milestone in the history of Pakistan’s micro-
finance sector. It was set up in 1996 by Roshaneh Zafar and became the country’s first dedicated MFI.
Zafar had received technical training to set up the institution from Muhammad Yunus himself at his
institution, that is, Grameen Bank in Bangladesh.
Funding for the foundation came in the form of both equity and debt financing from various sources,
such as the UK’s Department for International Development (DFID) and PPAF. As of December 2005,
the institution’s total loan facilities were just over PKR577 million while equity was close to PKR734
million as detailed in Exhibit 5.
Zafar saw Kashf as a social enterprise, that is, an institution with a strong social mission but one
where the business approach to management was applied. She and the institution’s board chose to hire
senior management with demonstrated managerial skills that had served in the private sector. Exhibit 6
shows Kashf Foundation’s organizational structure. As a mission-driven organization, its primary focus
was on providing access to finance to underserved women. In addition to microcredit, Kashf also had a
social action programme under which households were trained, counselled, exposed to interactive street
theatre and campaigns were conducted around women’s issues (Mahmood, 2007).
The principal product was microcredit, which was offered to groups of women who provided cross
guarantees on each other’s loans. Every group had a leader and groups met with the foundation’s officers
in regularly held group meetings in client homes. The foundation also added savings as a voluntary
product and credit life insurance as a mandatory product for the life of the loan. The loan period was
12 months, with the loan being payable in equal monthly instalments. At the completion of each successive
loan cycle, clients were offered a loan higher than the previous one by an amount of PKR4,000 or US
$65 (Mahmood, 2007).
By the mid-2000s, Kashf Foundation had become an institution recognized nationally and internation-
ally. In 2002, it received the Microfinance Excellence Award by the Grameen Foundation, USA. In 2003,
Roshaneh Zafar was awarded the Geneva-based Schwab Foundation’s Social Entrepreneurship Award as
well as the Tamgha-e-Imtiaz1 from the President of Pakistan, for her pioneering efforts in microfinance.
In 2007, Kashf Foundation became the third largest MFI in the country with 20 per cent of the total
market share. The dramatic growth in the institution’s client base, gross loan portfolio and net profit
shown in Exhibit 7 can be attributed to the maturing of existing clients which allowed them to take on
larger loans and an aggressive expansionary strategy that saw Kashf’s outreach spread to the entire
98 Asian Journal of Management Cases 14(2)

Punjab, Pakistan’s largest province. Karachi, the country’s port city and commercial hub, was added as
a new market for Kashf during this time. These developments helped the institution go from earning a
net loss to a net operating profit for the first time in 2003. But the fast-paced expansion led to the use of
outreach methods that caused an unprecedented number of multiple borrowings by borrowers. This
involved institutional practices at the loan officer level that ended up affecting its loan portfolio badly,
leading to a massive repayment crisis in 2008, as described in a later section (Burki, 2009).

From Kashf Foundation to Kashf Microfinance Bank

In 2001, the dynamics of the sector shifted in Pakistan with the passage of the Microfinance Institutions
Ordinance, which led to the establishment of MFBs. The first to be established included Khushhali
Bank, the First Microfinance Bank, and Tameer Bank. This ordinance and the Microfinance Prudential
Regulations that followed it entrusted the country’s central bank, the SBP, with the development of the
microfinance banking sector.
As described in Exhibit 8, there were important differences between the MFIs such as Kashf
Foundation, AKRSP and OPP and these newly established MFBs. First of all, the MFIs were registered
under various acts but the SBP was the sole regulator for all MFBs, making uniform regulatory oversight
possible. Second, the MFBs could fund their operations through deposit mobilization, while the MFIs
had to deposit all collected savings at scheduled commercial banks.
The MFBs were also granted access to concessional facilities and grants through the SBP (Haq &
Ahmed, 2010). These facilities were funded by the UK’s Department for International Development
(DFID) and the Asian Development Bank. Finally, the MFBs were provided with a five-year tax holiday
(International Monetary Fund, 2010). Of course, it must also be noted that Kashf Foundation was the
recipient of large international grants. Specifically, by the end of 2007, its equity of PKR1.5 billion was
primarily supported by grants from DFID, as well as grants and concessional loans from the PPAF.
Moreover, as a Section 42 company, its income was non-taxable.
Deposit mobilization was the most important advantage accruing to the MFBs. For a financial institu-
tion, deposits represented the most important source of funding. In the absence of the deposit mobiliza-
tion option, the MFIs had to rely on donor funding and the PPAF for funding. While the PPAF provided
MFIs with soft loans at 8 per cent, these rates would increase as the size of the organization grew, putting
an effective cap on subsidized lending as the MFIs tried to expand their customer base.
Thus, the largest MFIs began to consider spinning off their portfolios to create standalone MFBs. The
first of these was the Agha Khan Rural Support Programme (AKRSP), which established the First
Microfinance Bank in 2002. Another one was the National Rural Support Programme (NRSP)—the larg-
est MFI in the country. The NRSP Bank was incorporated in 2008.
Kashf Foundation also wanted to take advantage of deposit mobilization opportunities in order to grow
its institutional network and also to provide its clients with an institutional savings mechanism. It decided
to set up an MFB, but one that would balance the profit-making imperatives of a banking institution with
Kashf Foundation’s social mission. Using its international and local network, and Roshaneh Zafar’s repu-
tation as a microfinance pioneer, the foundation put together an impressive board of directors for the
proposed bank. This included the International Finance Corporation (IFC), ShoreCap International,
Women’s World Banking and Acumen Fund (refer to Exhibit 9 for a breakup of the initial shareholding).
Both Women’s World Banking and Acumen Fund were for-profit social impact investors, with a large
global presence, and a stated commitment to poverty alleviation and women empowerment.
Zulfiqar 99

In October 2008, Kashf Microfinance Bank was incorporated as a majority owned subsidiary of Kashf
Holdings Private Limited (KHPL). The initial paid up capital was PKR750 million. The foundation spun
off its high-end, individual loan portfolio to establish the bank. In other words, the smaller denomination
group loans remained with the foundation, while the portfolio of higher denomination individual loans was
transferred to Kashf Microfinance Bank. The inherited portfolio was 100 per cent urban (refer to Exhibit
10 for details on the portfolio breakup between Kashf Foundation and Kashf Bank at the time of the latter’s
incorporation). The bank began operations with five branches in urban Punjab and one in Karachi.

The Challenge: Building a Hybrid Organization

Mudassar Aqil began his career at M&T Bank, New York after earning his MBA from the Perdue School
of Business, Salisbury University in Maryland, USA. After working at M&T for nine years and moving
up to the position of vice president, he returned to Lahore. He then joined Bank Alfalah, a multinational
commercial bank, and quickly rose to the rank of general manager, a part of its executive management
team and its central management committee.
In 2011, he left Bank Alfalah to join Kashf Microfinance Bank. Aside from the fact that Alfalah was
an established multinational bank and Kashf Bank was a young, local institution, he knew he was taking
a risk by moving from commercial banking to microfinance. Most people identified microfinance with
NGOs, as MFBs were the youngest financial sector in the country. However, Aqil felt certain that MFBs
were the financial institutions of the future for a country like Pakistan, where only 12 per cent of the
people had access to formal financial services through commercial banks (Nenova et al., 2009). He was
convinced that the MFBs would expand the reach of financial services to the underserved population of
Pakistan, far quicker and much more efficiently than either commercial banksor the NGO MFIs. This
was because commercial banks were reluctant to serve vulnerable populations, and the MFIs were
dependent on subsidized funding and therefore, not sustainable in the long run.

Establishing a New Business Model

MFIs that employed the banking model were often called hybrids because in addition to their develop-
ment mission, they must also keep a strong focus on their financial bottom-lines (Battilana & Dorado,
2010). In that sense, they were neither entirely like the NGOs nor completely like commercial banks,
but a blend of the two.
As a new MFB, Kashf Bank was unlike other MFBs, for it did not have to build a brand image. Kashf
was a nationally and internationally recognized brand and its founder, Roshaneh Zafar, was well regarded
for having established the first specialized MFI in the country. Another advantage for Kashf Bank was
that it had inherited an existing portfolio at its inception from Kashf Foundation. By the first quarter of
2009, Kashf Bank had acquired more than 17,000 of Kashf Foundation’s microcredit clients, with a
combined gross loan portfolio of PKR460 million as shown in Exhibit 10. This included the foundation’s
individual loans, which were also its higher end loans. In the words of a senior officer at the
foundation:

The foundation is the nursery from where our clients graduate to become borrowers of the bank.

Kashf Bank was the seventh MFB to be established in Pakistan. Exhibit 11 provides an overview of the
MFB sector, with each MFB’s loan, savings2 and micro-insurance portfolio at the time when Kashf Bank
100 Asian Journal of Management Cases 14(2)

started operations. It shows that Kashf Bank began with a microcredit portfolio taken over from Kashf
Foundation but without a pre-existing savings or micro-insurance portfolio. The bank’s senior manage-
ment was conscious that success as an MFB meant future growth not just in the credit portfolio but also
in the savings portfolio, since long-term financial sustainability depended on deposit mobilization.
However, moving from the MFI to the MFB realm provided some challenges to the newly established
bank. KHPL’s board, the bank’s first chief executive and branch-level officers who had moved from
Kashf Foundation to Kashf Bank needed some time to shift gears from the NGO mode to the banking
mode. While the foundation maintained a business approach in its strategic planning and implementa-
tion, it nevertheless did not have to deal with central bank reporting requirements, nor did it have to face
competitive pressures from other MFBS on both the assets and liabilities side of its balance sheet.
Branch-level officers who had moved from the foundation to the bank had to be trained in individual
lending, which required a skill set different from that employed in managing a group loan portfolio. The
MFI approach to microcredit involved establishing a close relationship with clients. This was especially
the case in group-lending where groups of women provided cross guarantees on each other’s loans.
On the other hand, because of its individual loan portfolio, the bank had to focus much more on cash
flow and repayment capacity of clients.
In addition, as an MFB, Kashf Bank now had the license to raise deposits; however, with that came
the urgency to step up its efforts to achieve sustainability through deposit generation. Human resource
turned out to be a key challenge for the organization, for most of the branch-level officers did not have a
banking background and had to be taught to keep an eye on outreach3 numbers without losing sight of
the institution’s access to finance mission.
As an NGO, Kashf Foundation’s mission was to correct gender disparities in access to finance for
women. As part of this mission, it lent primarily to women, though there was also a small proportion of
male borrowers. It also funded women’s empowerment campaigns and financial literacy trainings for its
female clients. But as an MFB, Kashf Bank had to meet the stringent criteria stipulated under the pru-
dential regulations for MFBs established by the SBP. This in effect meant targeting clients with the best
risk-return profiles and keeping non-revenue generating activities to a minimum. To achieve this, the
bank chose to focus on cash flow based loans to micro and small enterprises in urban areas. Most of these
clients needed more money than the MFIs were able to lend to them. They also preferred individual loans
to avoid the joint liability stipulation of group lending. This led to an overwhelmingly male
borrower base, since male-run businesses, in Pakistan’s patriarchal setup, were larger and more profit-
able than female-run businesses. Research in other parts of the world, such as Africa, confirmed that this
was a worldwide trend (De Mel, McKenzie & Woodruff, 2009; Fafchamps et al., 2011). Exhibit 12
shows the gender breakup of Kashf Bank’s portfolio in 2012.
This experience was not unique to Kashf Bank, but had been well documented in the microfinance
literature. Battilana and Dorado (2010), for instance, described how Bolivian MFIs that evolved from
NGOs to commercialized entities in the 1990s had to face the double challenge of surviving the start-up
stage and simultaneously learning to strike a balance between the sometimes conflicting banking and
development institutional logics.
By 2012, the bank continued to have only one lending product and that was its individual loan. It had
also not introduced an insurance product. As a deposit taking institution, it worked hard to promote its sav-
ings product and offered returns at par with other banks and the leader of the MFB market, that is, Tameer
Bank. Consequently, its deposit base rose within a few years of its operations to more than one and a half
times its credit portfolio by 2012, as shown in Exhibit 12. By this time it had branches in three of the four
main provinces, that is, Punjab, Sindh and Khyber Pakhtunkhwa (KPK). This included sixteen districts
in Punjab, three districts in Sindh and three in KPK. Note that at this time the MFB with the
Zulfiqar 101

largest footprint in Pakistan, Khushhali Bank, had a presence in seventy two districts; the First Microfinance
Bank (FMFB) had fourty eight branches and Tameer Bank had thirty eight branches (MicroWatch, 2012).
Comparative industry details as of September 2012 are provided in Exhibits 13 and 14.
Funding for continued expansion was restricted to equity sources and the bank’s deposit mobilization
efforts, as commercial banks in the country were loath to lend to the MFBs, despite the fact that there
was a partial risk guarantee in place backed by the central bank itself, in case of MFB default on com-
mercial bank loans.

Unprecedented Crises
For Kashf Microfinance Bank, the ‘Kashf’ brand name soon turned out to be a very mixed blessing.
In 2008, the same year in which the bank had been set up, the foundation was hit by an unprecedented
crisis. The crisis came to public notice when a group of Kashf’s borrowers refused to repay their loans
in a peri-urban area near Lahore, the city where both the foundation and bank were headquartered. There
were conflicting reports about what actually led to the en masse default.
One factor that some have pointed towards was political interference, which was reminiscent of the
2010 microfinance crisis in the Indian state of Andhra Pradesh (Ross, 2010). In Kashf’s case, a member
of the National Assembly was said to have convinced some borrowers that they did not need to repay their
loans. This news spread rapidly through the borrowers’ social network, leading to a massive default (Chen,
Rasmussen & Reille, 2010). Another version described how some borrowers were told that Roshaneh
Zafar, Kashf’s founder, had died and on her death bed had expressed the desire to write-off all of Kashf’s
loans. But a carefully documented study, published by the Pakistan Microfinance Network—the microfi-
nance sector’s primary research centre—laid the blame on dubious practices of Kashf Foundation’s loan
officers, who were under pressure to meet their quarterly outreach targets (Burki, 2009).
Whichever version was correct, the fact remained that the crisis brought the entire industry to its
knees. It was similar in nature to the incidence of ‘unzipped’ group lending arrangements documented in
India, Bangladesh and Uganda (Gine, Krishnaswamy & Ponce, 2011; Wright & Rippey, 2003). A report
by the Consultative Group to Assist the Poor (CGAP) at the World Bank (Chen et al., 2010) highlighted
the growing vulnerabilities of the MFIs globally. It presented case studies of loan delinquency crises in
four countries, one of which was Pakistan’s 2008 repayment crisis. It found three factors responsible for
the delinquencies in all four countries: multiple borrowings, overstretched institutional controls and an
erosion of lending discipline.
The aftereffects of the crisis hit Kashf Bank particularly hard. Suddenly, bearing the same name as the
foundation became a double-edged sword for the newly established entity. According to senior manage-
ment, the bank spent the next three years putting out the fires caused by the crisis and trying to regain its
lost momentum. During this period, the bank’s portfolio-at-risk increased to 25 per cent. With a seriously
impacted portfolio, a cap on further lending had to be put in place. Refer to Exhibit 15 to see the quarterly
progression of the bank’s loan portfolio during these years. After three years of operations, the bank had
only opened 17 branches, and the growth of its lending portfolio continued to be lacklustre. After writing
off a large part of its overdue loans, without a commensurate increase in the loan portfolio, the bank
suddenly faced large losses (see Exhibit 2).
On the deposit side, however, Exhibit 11 shows a healthy growth pattern. By the third quarter of 2010,
deposits were already greater than the bank’s loan book. Nevertheless, this was just as much a result of
active deposit mobilization as it was a symptom of a stagnant loan portfolio. Second, the growth in
deposits was concentrated growth, that is, the bank’s deposit growth came at the back of a few high net
102 Asian Journal of Management Cases 14(2)

worth depositors. This meant that even if a handful of these depositors took their money elsewhere, there
would be a large drop in the bank’s deposit base.
When the SBP increased capital requirements for all the MFBs with national operations from
PKR 500 million to PKR 1 billion, net of all losses, Kashf Bank was asked to submit a capital plan to the
regulator describing how it would meet the new capital requirements, by the due date of 31 December
2013. With two-thirds of its equity gone and the daunting task of having to meet these increased capital
requirements, the bank looked towards its shareholders to inject fresh equity. However, the majority
shareholder in the bank was KHPL, which was already dealing with the aftermath of the repayment crisis
in the foundation and was in no position to put new funds in the bank. With the majority shareholder in
such a weak position, the minority shareholders also expressed their inability to raise fresh funds. Quite
understandably too, for all of Kashf Bank’s shareholders had taken a big hit on their capital given the
large losses the institution had sustained.

Key Considerations
While the bank’s equity position was certainly the most pressing problem at hand, Aqil also had to figure
out how to build an institutional culture for the organization that blended the logic of financial sustain-
ability with serving the financially underserved. For instance, should women continue to be side-lined by
the bank’s lending operations because cost considerations required lending to larger businesses, which
were usually associated with men? Second, should the bank continue to seek out large depositors, at the
expense of micro savers, because the former led to relatively faster growth in the deposit base?
For the moment, however, the senior management was consumed with thoughts of a looming bank-
ruptcy (see the bank’s deteriorating financials in Exhibits 1 and 2). Aqil and his team prepared a strategic
plan to take the institution out of the red by 2013 and shared it with the board of directors. Unfortunately,
the board remained unconvinced and no new equity was promised. The shareholders understood that
without a fresh injection of capital, the bank’s financial condition would continue to worsen. But it wasn’t
clear where that capital would come from. The minority shareholders were unwilling to take on this
burden. After taking substantial losses on their initial outlay, further investment without a clear exit option
would have been a poor business case for them to take back to their respective investment committees.
The only option that remained was to look for a new source of capital—a new majority shareholder.
If the bank could find an investor that would turn its balance sheet around and with a single capital injec-
tion allow it to meet the SBP’s capital requirements, it would grant Aqil and his team room to breathe
and put the strategic plan into action to achieve breakeven by 2013. There was no time to lose, and Aqil
knew he had to stop the hemorrhaging as soon as possible.
This wasn’t necessarily an ideal solution though, because a new majority shareholder would consider-
ably dilute the equity of the existing shareholders. It would, first of all, reduce KHPL to a minority
shareholder. Second, it would shave off several of the existing minority shareholders’ share to less than
10 per cent, at which point they would lose their seat on the board.
Aqil knew there were no easy answers. As the CEO of Kashf Bank, he had two primary responsibili-
ties. The first was a fiduciary responsibility to his creditors and depositors, which meant that he had to
ensure the financial health of the institution. The second was to the existing shareholders, who consti-
tuted the current board of directors. This put him in a bind. If he suggested to the board to take on a new
majority shareholder, he was fulfilling his fiduciary responsibility, but that would likely result in a dilu-
tion of their shareholding and place on the board.
Zulfiqar 103

Aqil also faced a private conflict. If the bank sank, so would his reputation and future career
prospects, given that he was at the helm of affairs at this crucial point in the institution’s history. On the
other hand, he realized that he had been hired by the original board of directors and may no longer have
a place in the organization if the new majority shareholder decided to replace Aqil and his team with
fresh management. This would be a serious blow to a man who had arrived in Kashf Bank after taking
two successive leaps of faith—the first was leaving New York at the peak of his banking career to return
to his homeland, and the second was leaving a stable job at a commercial bank to lead Kashf Bank.
The best case scenario would be an investor who chose to inject capital but allowed the current major-
ity shareholder and management team to stay at the helm of affairs, recognizing KHPL’s demonstrated
commitment to microfinance. This would allow KHPL to maintain management control and recoup its
losses down the road from future profits. The remaining shareholders could choose to maintain their
shareholding in such a scenario by injecting fresh equity when there were clear signs of a turnaround. For
Aqil, this would mean that he would not need to feel conflicted over his fiduciary responsibility and the
responsibility to the board. His personal conflicts would also dissipate in the process.
The worst case would be an investor that took control over the bank, retooled its mission to make it a
completely commercialized entity and got rid of the entire management team. Keeping in mind that the
latter was a more distinct possibility than the former, the search for a possible investor began at Kashf Bank.
As the news spread, Kashf Bank began to receive a few offers from local and international institu-
tions. Kashf after all was a well-known brand in the microfinance sector. Most interested parties were
local financial institutions or consortiums of financial institutions. Khushhali Bank, Pakistan’s largest
MFB, had just been sold to such a consortium led by the United Bank, one of Pakistan’s largest com-
mercial banks. However, Kashf’s board and senior management were expressly clear that they would
consider not just the financial capacity of a prospective buyer but also its commitment to Kashf’s social
mission of financial inclusion. Among the international institutions that approached Kashf Microfinance
Bank, one was the internationally renowned Foundation for International Community Assistance
(FINCA).

FINCA International
FINCA’s origins could be traced to 1984, when it began offering microcredit loans to low-income far-
mers in Bolivia using what FINCA called the ‘village banking approach’. Village banking referred to
group loans that had cross guarantees between groups of borrowers that served as collateral in these
otherwise uncollateralized lending arrangements.
From Bolivia, FINCA quickly expanded to other Latin American countries such as Mexico, El
Salvador and Honduras. In 1992, FINCA reached Africa and opened its first branch in Uganda. Three
years later FINCA’s outreach spread to yet another continent when it opened a branch in Kyrgyzstan, and
from there it added several other countries in Eurasia. In 2003, FINCA’s first branch in South Asia
opened in Afghanistan. By 2012, FINCA had a presence in twenty one different countries across five
continents.
Throughout these years of expansion, FINCA had instituted policies that were designed to maintain
its commitment to financial inclusion, poverty alleviation, asset building and job creation.
In 2010, it changed its business model by establishing FINCA Microfinance Holding Company LLC
(FMH). FMH was established to allow FINCA access to capital markets in order to continue its expan-
sion into new markets and to strengthen its presence in existing ones. Exhibit 16 shows the breakup of
104 Asian Journal of Management Cases 14(2)

the capital injection by the investors FINCA partnered with to establish FMH. Through this partnership,
FMH raised US $74 million in funds with FINCA International retaining 66 per cent of the ownership in
the holding company, as well as a veto vote on strategic decisions taken by the FMH board.
A key component of FINCA’s international growth strategy was to support local institutions in trans-
forming from microfinance NGOs into double bottom-line licensed financial institutions. Battilana and
Dorado (2010) had defined double bottom-line institutions as organizations that maintained equal
emphasis on their financial bottom-line and social mission.
FINCA’s line of control ran from its head office in Washington DC to its four regional directors, and
from there to each individual country subsidiary. FINCA ensured consistency across its various
sub-sidiaries by placing officers from different subsidiaries in different countries for a few years at a
time, ensuring that its higher management got adequate global experience in managing MFIs.

The Decision
In November 2012, Mudassar Aqil sat in his office evaluating the offers that lay before him. Should he
convince his board of directors to invite a local institution to buy KHPL’s majority shareholding in Kashf
Bank? This would allow Kashf to keep its brand name, which by now had been cleared of all the negati-
vity that had come with the rumour incident and was once again recognized as a trustworthy name across
Pakistan and beyond. One of these institutions was a local telecommunications company that wanted the
opportunity to explore branchless banking by taking over a local MFB. Another option was a consortium
of local investors that wanted to exploit Kashf’s brand name. In purely financial terms, both offers would
substantially improve the bank’s balance sheet and pull it out of the red.
Then there was FINCA, an unfamiliar name in the Pakistani market, but a widely respected brand in
the international community with solid credentials. FINCA also had a strong commitment to the goal of
financial inclusion. Through its long association with hybrid MFIs in Latin America, FINCA was an
expert in managing double bottom-line institutions. But there was a catch: FINCA had asked for 90-day
exclusivity to conduct due diligence, and enter into negotiations with Kashf Bank’s shareholders to make
an offer to acquire a majority shareholding. This posed the risk that at the end of the 90-day period,
FINCA may walk away without making an offer. Granting exclusivity would mean that the bank could
not discuss the potential transaction with any other suitor during this period.

Exhibit 1. Capital Injection into FINCA

Management Holding Company—2012

IFC   $35 million

KfW   $15 million
FMO   $14 million
Resp   $5 million
Triodos   $5 million
Total $74 million
Source: FINCA (2012).
Zulfiqar 105

Exhibit 2. Kashf Bank Balance Sheet Data

Balance Sheet Data 2012 (PKR 000) 2011 (PKR 000) 2010 (PKR 000)
ASSETS
Cash balances with SBP and NBP 135,014 86,311 87,648
Balances with financial institutions/NBFIs 403,525 293,881 400,875
Lending to financial institutions – – –
Net investments 142,781 72,673 28,767
Net advances 1,140,998 692,494 430,382
Operating fixed assets 200,220 218,774 223,538
Other assets 49,016 51,035 34,670
Deferred tax assets 46,275 36,989 22,460
Total assets 3,978,864 1,452,157 1,228,339
Liabilities
Deposits and other accounts 1,727,060 1,141,614 776,401
Borrowings – – –
Subordinated debt – – –
Other liabilities 106,128 61,987 49,659
Deferred tax liabilities – – –
Total liabilities 1,833,188 1,203,601 826,060
Net assets 284,641 248,556 402,279
Represented by
Share capital 1,620,000 750,000 750,000
Discount on issue of shares 669,900 – –
Statutory reserve – – –
Depositor’s protection fund – – –
Accumulated loss (681,342) (544,940) (399,457)
Deferred grants 15,883 43,496 51,736
Total capital 284,641 248,556 402,279
Source: Kashf Bank Audited Financial Statements 2011 and 2012.
106 Asian Journal of Management Cases 14(2)

Exhibit 3. The Microfinance Timeline in Pakistan

Source: Hussein (2009).

Exhibit 4. Interest Rate Comparison

Interest Rate Range

Arthi 61–81 per cent
Microfinance institutions and 24–43 per cent
microfinance banks
Sources: ShoreBank International-Pakistan (2011); Haq
et al. (2013).
Zulfiqar 107

Exhibit 5. Kashf Foundation—Debt and Equity Position (As of 31 December 31 2005)

PKR
Funding Source  (Million)
Loan Facilities 
Pakistan Poverty Alleviation Fund (PPAF)  374.68
Grameen Foundation USA  21.20
Acumen Fund  8.92
Muslim Commercial Bank (MCB)  172.32
Total  577.13
Equity 
UK’s Department for International Development (DFID)  254.23
Aga Khan Foundation  39.53
Consultative Group to Assist the Poor  36.49
Others  45.61
Total Grants  375.87
Retained Earnings  357.62
Total Equity  733.47
Source: Mahmood (2007).

Exhibit 6. Kashf Foundation’s Organizational Structure

Source: Kashf Foundation, 2005 Annual Report.

108 Asian Journal of Management Cases 14(2)

Exhibit 7.  Kashf Foundation Financial Performance

  1999  2000  2001  2002  2003  2004  2005  2006  2007

No. of active 913  3,406  7,221  15,706  45,331  67,552  72,507  133,363  282,396
clients 
Gross loan     18.52  32.64  207.49  467.12  758.36  1,339  2,536
portfolio
(PKR million) 
Net operating N/A  N/A  (5.29)  (4.76)  4.48  74.03  107.01  111.57  429.40
profit
(PKR million) 
Source: Mahmood (2007).

Exhibit 8.  Institutional Differences between MFBS and MFIS

  MFBs  MFIs
Institutional Form  Banking institutions  Usually non-governmental organizations
Regulation  Regulated by the State Can be registered under any of the following acts:
Bank of Pakistan (SBP) Companies Act, Trust Act, Societies Registration Act
as per the Microfinance or Voluntary Social Welfare Agencies Act
Institutions Ordinance 
Funding  Deposits; credit from Soft lending from the PPAF, grants and subsidies from
commercial banks; other donors.
specialized grants The largest MFIs are sometimes able to get lines of
through the SBP   credit from local commercial banks 
Deposit mobilization  Yes  Savings collected must be deposited with licensed
commercial banks and cannot be used as a funding
source
Products and services  Microcredit; savings; life Microcredit; savings; life and health insurance
and health insurance 
Target market  Earning less than taxable Self-employed, at initial loan application living at or
income, primarily male  below $2 a day poverty line, primarily female
Source: Zulfiqar (2014).

Exhibit 9.  Kashf Microfinance Bank Initial Shareholding

Kashf Holdings Private Limited (KHPL)   51 per cent

International Finance Corporation    19 per cent
ShoreCap International    10 per cent
Women’s World Banking    10 per cent
Acumen Fund    10 per cent
TOTAL  100 per cent
Source: Kashf Microfinance Bank.
Zulfiqar 109

Exhibit 10. Client and Portfolio Breakup at Start of Operations

  Kashf Foundation  Kashf Bank 

Rural Clients 
Before spinoff   30,506    
After spinoff   54,834    –
Urban Clients 
Before spinoff   301,859    
After spinoff   245,864    17,271  
Group Clients 
Before spinoff   319,652    
After spinoff   300,698    –
Individual Clients 
Before spinoff   17,004  
After spinoff   –  17,271
Total Clients 
Before spinoff   336,652  
After spinoff   319,381  17,271  
Total Gross Loan Portfolio (In Millions of PKR) 
Before spinoff   3,232    
After spinoff   2,978    460  
Source: Pakistan Microfinance Network.

Exhibit 11. MFB Industry Profile in the Year of Kashf Bank’s Incorporation (as of December
2008)

Number of Clients
MFB  Microcredit   Savings  Micro-insurance
Kashf Bank  17,271  0  0
Khushhali Bank  366,714  0  366,714
First Microfinance Bank  171,795  144,898  171,795
Tameer Bank  43,816  76,133  43,816
Apna   2,557  1,434  0
NRSP Bank  0  0  0
Pak Oman  15,702  26,859  0
Portfolio Value (In Millions of PKR) 
MFB  Microcredit   Savings  Micro-insurance
Kashf Bank  460  0  0
Khushhali Bank  3,397  0  3,397
First Microfinance Bank  2,136  3,317  2,136
Tameer Bank  908  642  908
Apna   73  45  0
NRSP Bank  0  0  0
Pak Oman  138  25  0
Source: Pakistan Microfinance Network.
110 Asian Journal of Management Cases 14(2)

Exhibit 12.  Kashf Microfinance Bank—Portfolio Details (as of September 2012)

Male Female Total
Number of borrowers 21,841 793 22,634
Gross loan portfolio (PKR) 929,970,614 35,455,996 965,426,610
No. of active savers 147,530 9,550 157,080
Value of savings (PKR) 1,170,492,603 342,857,880 1,513,350,483
Source: Pakistan Microfinance Network.

Exhibit 13. Microfinance Industry Statistics (as of September 2012)

Nationwide Industry Data

Number of branches 1,780
Number of districts covered 93
Penetration rate (coverage of 8.74%
 population)
Active borrowers 2,394,205
Gross loan portfolio PKR 37,973 million
Average loan size 23,245
Number of savers 4,514,149
Value of savings PKR 20,132 million
Average savings balance PKR 4,460
Source: Pakistan Microfinance Network.

Exhibit 14. MFB Industry Profile (as of September 2012)

Number of Clients
MFB  Microcredit   Savings  Micro-insurance
Kashf Bank   22,634 157,080 0
Khushhali Bank  468,484  385,791  367,154
First Microfinance Bank  166,563  246,554 196,876
Tameer Bank  152,297 942,186  79,093
Apna   1,454 18,213 0
NRSP Bank  177,576 55,199 177,576
Pak Oman  12,040 17,287 0
Portfolio Value (In Millions of PKR) 
MFB  Microcredit   Savings  Micro-insurance
Kashf Bank  965 1,513  0
Khushhali Bank  5,897 2,270   5,198
First Microfinance Bank  3,698 6,220   4,064
Tameer Bank  6,670  6,777  1,035
Apna   59 523 0
NRSP Bank  3,729  1,025  2,664
Pak Oman  154 22 0
Source: Pakistan Microfinance Network.
Zulfiqar 111

Exhibit 15. Kashf Microfinance Bank’s Loan and Savings Portfolio

Gross Loan Portfolio Total Savings

Quarter  (In Millions of PKR) (Value in Millions of PKR)
2009Q1 460
2009Q2 399 21
2009Q3 394 80
2009Q4 420 318
2010Q1 451 733
2010Q2 442 424
2010Q3 440 474
2010Q4 446 776
2011Q1 495 733
2011Q2 563 947
2011Q3 627 895
2011Q4 695 1,142
2012Q1 705 1,186
2012Q2  838  1,605
2012Q3  965  1,513

Percentage Change in Quarterly Growth in the Gross Loan Portfolio

112 Asian Journal of Management Cases 14(2)

Percentage Change in Quarterly Growth in Total Savings

Source: Pakistan Microfinance Network.

Exhibit 16.  Kashf Bank Income Statement Data

2012 2011 2010

Statement of Income Data (PKR 000) (PKR 000) (PKR 000)
Interest income 409,687 292,276 214,687
Interest expense (127,978) (70,563) (65,786)
Net interest income 281,709 221,714 148,901
Provision for loan losses (15,576) (8,953) (32,177)
Net interest income after 266,133 212,761 116,724
 provisions
Non-interest income
Fee, commission, brokerage 68,494 50,836 40,362
Other income 24,116 32,170 27,658
Total non-interest income 92,610 83,005 68,020
Non-interest expenses
Administrative expenses (486,596) (447,868) (363,549)
Other charges (14,547) (4,808) (6,950)
Total non-interest expenses (501,143) (425,675) (370,499)
Loss before taxation (142,400) (156,909) (185,755)
Taxation - current year (3,468) 11,213 11,515
Taxation - deferred 9,350 0 0
Zulfiqar 113

2012 2011 2010

Statement of Income Data (PKR 000) (PKR 000) (PKR 000)
Loss after taxation (136,518) (145,696) (174, 240)
Total comprehensive loss (136,402) (145,696) (174, 240)
Accumulated loss brought forward (544,940) (339,457) (225,218)
Accumulated loss (681,342) (545,154) (399,457)
Source: Kashf Bank Audited Financial Statements 2011 and 2012.

Just as FINCA made this conditional offer, another investment consortium, headed by a highly repu-
table global microfinance foundation, approached the bank but asked for a month to put a due diligence
team together. This consortium had just lost its bid on another Pakistani MFB. The problem was that if
Kashf Bank waited around for this new consortium to cobble together a team, it would lose out on
FINCA’s offer, for FINCA had asked for immediate exclusivity. FINCA had also made it clear that if it
were to take up a majority shareholding in the bank, it would rename Kashf Microfinance Bank as
FINCA Microfinance Bank. Aqil and his senior management felt apprehensive replacing Kashf, a popu-
lar brand name, with a foreign and unfamiliar name. How would its borrowers and depositors react to
this change? They had no way and time to find this out at the moment.
The pressure from the State Bank mounted on the management to present a plan to meet its MCRs and
Capital Adequacy Ratio (CAR), and the threat of a credit rating downgrade loomed large. In these
circumstances, what should Mudassar Aqil recommend to the board? Should he ask them to accept the
offer from a local investor or should he recommend instead that they grant FINCA exclusivity to conduct
due diligence with the intent to acquire a majority shareholding in Kashf Bank? Yet another option would
be to wait for the other international consortium to put their due diligence team together.

Notes
1. Civilian medal of excellence granted by the State of Pakistan.
2. These are not restricted to micro-savings but include the savings of the wealthy as well.
3. Outreach refers to the number of people served by microfinance.

References
Battilana, Julie, & Dorado, Silvia. (2010). Building sustainable hybrid organisations: The case of commercial micro-
finance organisations. Academy of Management Journal, 53(6), 1419–1440.
Burki, Hussan B. (2009). Unravelling the delinquency problem (2008/2009) in Punjab–Pakistan (MicroNote No.10).
Islamabad: Pakistan Microfinance Network.
Chen, Greg, Rasmussen, Stephen, & Reille, Xavier. (2010). Growth and vulnerabilities in microfinance (Focus Note
No. 61). Washington DC: CGAP.
De Mel, Suresh, McKenzie, David, & Woodruff, Christopher. (July 2009). Are women more credit constrained?
Experimental evidence on gender and microenterprise returns. American Economic Journal: Applied Economics,
1(3), 1–32.
Demirguc-Kunt, Klapper Asli, Singer, D. Singe. (2013). Financial Inclusion and Legal Discrimination Against
Women: Evidence From Developing Countries. World Bank Policy Research, Working Paper 6416. Washington
DC.
Fafchamps, Marcel, McKenzie, David, Quinn, Simon R., & Woodruff, Christopher. (2011). When is capital enough
to get female microenterprises growing? Evidence from a randomized experiment in Ghana (NBER Working
Paper No. 17207), Cambridge, USA.
114 Asian Journal of Management Cases 14(2)

FINCA. (2012). FINCA International 2012 Annual Report. Washington DC: FINCA.
Gine, Xavier, Krishnaswamy, Karuna, & Ponce, Alejandro. (2011). Strategic default in joint liability groups:
Evidence from a natural experiment in India. Washington DC: The World Bank.
Haq, Aban, Aslam, Amal, Chaudhry, Aqeel, Naseer, Asad, Muhammad, Kabeer, Mushtaq, Khalid, & Farooqi,
Maheen. (2013). Who is the ‘arthi’: Understanding the Commission Agent’s role in the agriculture supply chain.
IGC Working Paper. Islamabad: Pakistan Microfinance Network and National Institute of Banking and Finance.
Haq, Aban, & Ahmed, Syed Mohsin. (2010). Significance of small deposits for microfinance providers. Islamabad:
Pakistan Microfinance Network.
Hasan, Arif, & Raza, Mansoor. (2011). From micro-finance to the building of local institutions. Karachi: Oxford
University Press.
Hussein, Maliha H. (2009). State of microfinance in Pakistan. Dhaka: Institute of Microfinance.
Mahmood, Mahboob. (2007). Kashf Foundation—A Pakistani microfinance organisation gears up for dramatic
growth (Case No. 07/2007-5446). Paris: INSEAD Business School.
MicroWatch. (2012). Pakistan Microfinance Network. MicroWatch Newsletter. Islamabad, Pakistan.
Nenova, Tatiana, Niang, Cecile T., & Ahmad, Anjum. (2009). Bringing finance to Pakistan’s poor: A study on access
to finance for the underserved and small enterprises. Washington DC: World Bank.
Rauf, Shahnaz A., & Mahmood, Tahir. (2009). Growth and performance of microfinance in Pakistan. Pakistan
Economic and Social Review, 47(1), 99–122.
Ross, Peg. (2010). Learning from the Indian microfinance crisis. Washington DC: CGAP.
Rural Support Programme Network. (2011). Our history. Retrieved from http://www.rspn.org/index.php/about-us/
our-history
ShoreBank International-Pakistan. (2011). Estimating micro-businesses’ ability to pay. Islamabad, Pakistan:
Pakistan Microfinance Bank.
World Bank. (2015). The Global Findex Database 2014 – Policy Research Working Paper 7255. Washington DC.
Wright, Graham, & Rippey, Paul. (2003). The competitive environment in Uganda: Implications for microfinance
institutions and their clients. Uganda: UK’s Department for International Development (DFID) Financial Sector
Deepening Project.
Zulfiqar, Ghazal. (2014). Microfinance: To what end? Findings from Pakistan. Economic and Political Weekly,
49(10), 63–67.