Business Plan and Operationalisation for SME Focused Non-Bank Financial Company (NBFC)
2019-08-31 - 2020-06-30
After conducting in 2018 a feasibility study – which also included an independent review of its operational, legal and regulatory structure – Karandaaz decided in principle to set up a commercially-driven and privately-managed Special Purpose Vehicle (“SPV”), focused on providing financing to SMEs in specific sectors, selected using a multi-factor framework, including regulatory, financial, human resource, taxation and development impact parameters.
The primary drivers for this decision are Karandaaz’s goals to leverage its capital, enable more flexibility in its capital deployment, and demonstrate development impact, specifically with regards to funding the Pakistani SME sector. The feasibility study also recommended that the SPV adopts the legal structure of Non-Bank Finance Company (“NBFC”), licensed under the regulations of the Securities & Exchange Commission of Pakistan (“SECP”). This recommendation was based on considerations in terms of impact, governance, compliance, access to human resource and leveraging available funds.
Karandaaz followed up on this decision by conducting an additional SME sector selection exercise in Q2 2019, and engaging the services of LFS in Q3 2019 to develop a detailed business plan, complete with sectoral focus, financial projections, risk profiling and an operationalization strategy for an NBFC providing financial services to Pakistan’s SME sector.
Phase 0 - Inception: Understanding Existing and Proposed Role of Karandaaz Capital vis a vis SME Financing in Pakistan
Develop an understanding of Pakistan’s NBFC sector, and the current business of Karandaaz Capital by reviewing:
a. Findings of the Feasibility Study, including developing an understanding of Pakistan’s SME market (demand and supply side);
b. The results of market penetration strategies employed (supply chain financing, risk participation agreements with FIs, and direct to corporate) by Karandaaz Capital;
c. Proposed investment strategy (validate the Business Case in terms of products, sectors, geographic focus and delivery channels; validate the sector selection methodology to focus on 3-4 sectors/clusters; validate the potential market size for the NBFC)
d. Understanding Karandaaz’s sponsor and Board expectations (discussions with DFID, the Karandaaz Board and IC, CEO and CIO and relevant personnel in SBP, SECP, Chambers of Commerce, Trade Associations, banks, NBFIs and potential SME clients).
Phase I – Market Analysis and Business Model
a. Competitive environment of the proposed NBFC;
b. Vision, Mission, and Strategic Goals and Objectives of the entity;
c. Analysis of each of the Validated Sectors (size, expected growth, segmentation, capital requirements, value chain analysis, key challenges, sector-wise financial product portfolio, target Partner Institutions, need for Technical Assistance/Demand-side interventions).
Phase II – Product Portfolio and Channels
a. Develop a product portfolio for each selected sector (optimal mix of term loans vs working capital, secured vs. unsecured loans; Risk Assessment Criteria in case of product programs), including an assessment on how the products affect channel strategy and technology.
b. Detailed Channel Strategy on how to reach the end customers based upon the segmentation - optimal mix of retail and wholesale operations, digital outreach vs. branch network etc.
Phase III – Financial Model
Based on the market analysis and business model, develop a set of scenarios (market growth rate, geographical focus, risk, socio-economic impact) and detailed financial projections (expected returns, operations cost, margin, breakeven point) using different scenarios will be prepared for base case, high growth and low growth. The model should be able to perform sensitivity analysis.
Phase IV – Financing Strategy and Capital Structure
a. Equity capital base required for the company based on market opportunity;
b. Optimal capital structure of the entity in view of taxation and credit rating;
c. Develop a plan to attract target capital sources for the NBFC apart from Karandaaz sponsorship;
d. The feasibility of securitization & refinancing within the regulatory space of Pakistan; and
e. Specify key parameters for achieving a good credit rating for the entity at the inception phase and develop a plan for NBFC to achieve the target rating.
The financing strategy and capital structure should be formulated based on: provision of debt financing (average loan sizes and disbursements), deal flow, growth of capital, expected losses, non-preforming loans and tax implications.
Phase V – Operationalization Plan of NBFC
This phase will cover the operationalization plan of the NBFC:
a. IT systems requirement (Financial applications, MIS and CRM, Product-based systems such as systems for invoice discounting, supply chain financing and leasing)
b. Regulatory Compliances and Taxation
c. Human Resource Requirement: design the organisational structure and specify the type of staff required, including job descriptions and compensation strategy. This should include an assessment of initial staff required based on IT systems, branch network and reporting compliances. The HR plan should include how the requirements of the staff will evolve as per each of the selected scenarios.
d. Core Customer Base: strategies for accessing a core customer base for the NBFC. The plan should also identify quick wins for the NFBC i.e., the initial deal flow in the selected sectors.
e. Corporate governance structure
f. Impact Assessment Framework: propose how to embed an Impact Assessment Framework in the IT infrastructure
g. Risk strategy: detailed risk matrix including sectoral, credit, liquidity and market risk associated with proposed risk mitigation strategies.
Phase VI – Project Support for Setting up NBFC
Support to Karandaaz for setting up the entity and rolling out the operationalisation plan: detailed work plan consisting of activities, timelines, and responsibilities. The Project Management Unit will support Karandaaz to make the entity ready for serving the customers including the channel strategy, roll out of branches, etc. The project plan will be the key project management document for the program team to be used for establishing the NBFC and operationalizing the Business Plan.