VIS Microfinance Bank Rating

VIS
Credit Rating Company Limited vis.com.pk 1 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 MICROFINANCE VIS Credit Rating Company Limited

VIS
Credit Rating Company Limited vis.com.pk 2 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025
Table of Contents
SCOPE OF CRITERIA..........................................................................................................................................................................3
SUMMARY OF CRITERIA CHANGES ..........................................................................................................................................3
AN OVERVIEW OF RATINGS FRAMEWORK ..........................................................................................................................3
RATING METHODOLOGY..........................................................................................................................................................3
A. OPERATING ENVIRONMENT ..............................................................................................................................................3
B. STANDALONE OPERATING PROFILE ..............................................................................................................................4
C. EXTERNAL SUPPORT...............................................................................................................................................................8
D. IMPACT ASSESSMENT............................................................................................................................................................9
RATING SCALE & DEFINITIONS ...................................................................................................................................................9

VIS
Credit Rating Company Limited vis.com.pk 3 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 SCOPE OF CRITERIA The scope of this methodology extends to the microfinance sector of Pakistan comprising Microfinance Banks (MFBs), Non-Bank Microfinance Institutions (NBMFIs), Rural Support Programs (RSPs), and Non-Governmental Organizations (NGOs) that collectively aim to enhance financial inclusion for low-income households and small entrepreneurs. The sector is regulated primarily by the State Bank of Pakistan (for MFBs) and the Securities and Exchange Commission of Pakistan (for NBMFIs), and is supported by the Pakistan Microfinance Network (PMN). Throughout this document, the term Microfinance Institution (MFI) is used as a broad reference encompassing MFBs, NBMFIs, NGOs, and RSPs, unless otherwise specifically stated. SUMMARY OF CRITERIA CHANGES The Microfinance banks Rating Methodology dated October 2023 has been updated with an enhanced scope to include other microfinance institutions and support programs. AN OVERVIEW OF RATINGS FRAMEWORK The analytical framework for evaluating Microfinance Institutions is structured around three core pillars. First, the Operating Environment, which captures the broader economic and industry risks that shape the sector’s stability and growth potential. Second, the Standalone Profile, which assesses the institution’s intrinsic strengths and weaknesses, including its operational efficiency, market positioning, asset quality, funding profile, liquidity, and capitalization. Finally, External Support considers the degree of backing available from sponsors, donors, or affiliated institutions, which can provide additional resilience in times of stress. Together, these elements form a comprehensive basis for rating Microfinance institutions by balancing macro-level risks, institutional performance, and external support mechanisms. ANALYTICAL FRAMEWORK RATING METHODOLOGY A. OPERATING ENVIRONMENT The operating environment of the microfinance sector in Pakistan is shaped by the country’s macroeconomic conditions, regulatory framework, and industry dynamics. Given the sector’s strong linkage with low-income and rural populations, it is particularly sensitive to fluctuations in inflation, interest rates, employment trends, and agricultural productivity, which directly affect borrowers’ repayment capacity. The dominance of agriculture and services in Pakistan’s economy amplifies exposure to climate risks and commodity price volatility. In addition, the unpredictability of government procurement and agricultural policies represents a further environmental risk, potentially affecting production stability Operating Environment Relates to economic and industry risks Standalone Profile Relates to operational strengths & weaknesses of the institution External Support Relates to support available from sponsors/ donors

VIS
Credit Rating Company Limited vis.com.pk 4 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 and sector performance. On the regulatory side, the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan play a key role in setting prudential standards, promoting financial inclusion, and encouraging digital financial services. While growing demand for small-scale credit and savings products provides expansion opportunities, challenges such as high operational costs, limited borrower resilience, and rising competition continue to weigh on the sector’s risk profile. B. STANDALONE OPERATING PROFILE B. (i) Capitalization In evaluating the capitalization of microfinance banks and institutions, the focus is on the adequacy, quality, and sustainability of capital in relation to regulatory requirements and the underlying risk profile. Particular emphasis is placed on compliance with the minimum capital requirement and capital adequacy ratio. The analysis also considers the quality and composition of capital, with a stronger focus on Tier-I capital given its permanence and therefore its stronger reliability to absorb losses. Internal capital generation through earnings retention, dividend policies, and the ability of capitalization to support growth and risk-taking are also important considerations. Leverage levels and the debt-to￾equity mix provide further insight into resilience and the capacity to withstand shocks, especially in view of the elevated credit and operational risks in the microfinance sector. The analysis also incorporates forward-looking aspects, including projected capital needs and the institution’s ability to mobilize fresh equity or subordinated debt to sustain future expansion. B. (ii) Asset Quality The asset quality of a Microfinance Institution serves as a direct reflection of the institution’s appraisal standards, internal controls, portfolio monitoring practices, and the management’s depth of experience in the microfinance sector. In evaluating asset quality, the level of delinquency is a critical indicator, particularly given the unique nature of microfinance lending.

VIS
Credit Rating Company Limited vis.com.pk 5 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 Micro-loans are generally extended for shorter tenors with frequent repayment schedules, and often allow prepayment. As a result, early signs of delinquency become visible more quickly compared to conventional lending. While loan losses may be triggered by temporary business shocks or personal crises, the probability of eventual recovery in certain cases remains significant. Hence, the rating assessment focuses not only on reported NPL levels but also on patterns of classification, historical recovery experience, and underlying reasons for delinquency. Key asset risk considerations include rapid loan growth, deterioration in the existing loan portfolio, adequacy of provisioning and collateral coverage, and concentration risk across counterparties, sectors, and geographies. Rapid growth, when accompanied by weaker underwriting or relaxed credit discipline, can heighten asset quality pressures, particularly during economic downturns. Segment-wise loan growth is also reviewed to assess whether expansion is concentrated in higher-risk segments, which may pose additional credit risk. Similarly, excessive reliance on specific sectors or geographic areas may magnify credit and earnings volatility in the event of sectoral or regional stress. B. (iii) Quality and Earning Stability The quality and stability of earnings are critical indicators of the long-term sustainability of a microfinance institution. Earnings provide the primary buffer against credit and operational losses and directly influence an institution’s ability to strengthen capital, expand outreach, and withstand stress in adverse operating environments. In assessing earnings quality, the analysis focuses on both the composition and durability of revenues. Given the reliance of MFIs on profit income, the sustainability of margins is closely linked to portfolio yields, funding mix, and operating efficiency. Institutions with a diversified revenue base are generally better positioned to mitigate earnings volatility. At the same time, the cost of funds and access to concessional or commercial borrowings are key determinants of net margins and overall profitability. Earnings stability is evaluated in relation to credit costs, which tend to be more volatile in microfinance due to the vulnerability of low-income borrowers to economic and social shocks. The adequacy and consistency of provisioning policies, particularly in periods of stress, are important considerations. High provisioning reversals or one-off income sources may temporarily boost profits but are not considered indicators of sustainable earnings. Operational efficiency is a defining feature of the sector. MFIs with well-established processes, technology-driven platforms, and effective scale management typically report lower operating expenses relative to peers. Efficiency ratio is therefore an important measure in assessing earning
quality. B. (iv) Liquidity Management Liquidity assessment for Microfinance Banks and Institutions is a critical component of the overall credit rating framework. Given the distinctive funding structures of deposit-taking and non–deposit-taking entities, the analytical approach varies accordingly. For deposit-taking MFBs, the stability of the deposit base is a central consideration. The evaluation covers the composition and granularity of deposits, average deposit size, depositor profile, and the proportion of deposits mobilized from borrower-savers, which is considered a proxy for client empowerment and institutional outreach. Smaller, granular deposits typically reduce withdrawal concentration risk and mitigate the likelihood of a “run” on deposits. Liquidity strength is further assessed through the adequacy of unencumbered liquid reserves, primarily in the form of bank balances and government securities, relative to short-term liabilities. Loan-to-deposit ratios, holdings of statutory liquidity reserves, and compliance with regulatory requirements provide additional benchmarks.

VIS
Credit Rating Company Limited vis.com.pk 6 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 For non–deposit-taking MFIs, the focus shifts to funding stability and diversification, given their reliance on borrowings from banks, DFIs, multilaterals, or donor agencies. Key considerations include lender concentration, maturity profile of borrowings, refinancing risk, and availability of committed but undrawn credit lines. The adequacy of liquid assets relative to debt service needs and operational expenses is also a critical determinant of liquidity strength. Across both deposit-taking and non–deposit-taking institutions, liquidity analysis involves an appraisal of asset–liability maturity mismatches, particularly in short-term buckets (up to one year). Persistent mismatches beyond six months are viewed as a potential vulnerability that may necessitate asset sales at unfavorable terms during stress scenarios, thereby affecting profitability. The robustness of the institution’s stress-testing framework and the prudence of liquidity management policies are evaluated to determine resilience under adverse market and economic conditions. B. (v) Market Access An MFB’s market position is gauged through its share of industry deposits, with higher market share reflecting stronger franchise and depositor confidence. Market share carries notable weight in assessing market access and may differentiate institutions in higher rating bands. The funding profile is evaluated by examining reliance on deposits versus capital or money market-based funding. Deposits are generally viewed as more stable, particularly when granular, retail-focused, and supported by a healthy CASA mix. Conversely, heavy dependence on money market borrowings or concentrated deposits heightens liquidity risk. Granularity, depositor concentration, and branch network diversification are key indicators of funding stability. Overall, market access reflects the balance between competitive deposit share, funding mix, and depositor profile. B. (vi) Internal Audit & Risk Management The quality of internal audit and risk management is a key determinant of an MFI/MFB’s overall risk profile. In evaluating the risk management framework, the analysis focuses on the robustness of policies, systems, and governance structures for identifying, measuring, and mitigating risks inherent to the sector. Particular emphasis is placed on credit risk management, given the low-income and largely informal borrower base. Underwriting standards, portfolio diversification, and collection mechanisms are critical areas of review. Internal audit effectiveness is assessed through the breadth of process coverage, frequency and depth of audits, timeliness of reporting, and implementation of corrective measures. A strong audit function reflects a sound control environment and supports the early identification of operational vulnerabilities. Operational risk is evaluated through the adequacy of internal controls,
reliability of IT systems, fraud prevention practices, and the quality of human resource management. Liquidity and market risks are analyzed with reference to funding concentration, asset–liability management practices, and resilience to fluctuations in interest rates or funding costs and in some case currency risks. Governance quality, including board oversight, management accountability, and the independence of risk and audit functions, remains a central consideration. Stress-testing practices and contingency planning are also reviewed to assess preparedness for adverse scenarios. Given the unique features of microfinance, product design and delivery mechanisms remain integral to risk management. The absence of tangible collateral and reliance on micro-entrepreneurs with limited financial documentation heighten the importance of robust and well-structured lending practices. While group lending and peer monitoring have historically been used as tools to mitigate credit risk and adverse selection, their relevance has evolved over time, with institutions increasingly adopting individual lending models or hybrid approaches based on

VIS
Credit Rating Company Limited vis.com.pk 7 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 their client base and operational strategy. The institution’s ability to design, implement, and adapt appropriate lending mechanisms in response to changing market dynamics remains a key determinant of long-term resilience. B. (vii) Management Quality Management capacity to manage risks through the business cycle is the most important determinant of the managerial efficiency in an MFB/MFI. Institutions are expected to maintain a balanced mix of leadership comprising individuals with prior experience alongside professionals with technical expertise in the broader microfinance sector. VIS considers that sustainability hinges on ensuring operations are conducted on a commercial basis, while remaining sensitive to the unique requirements of the microfinance segment. This necessitates the recruitment, development, motivation, and retention of specialized human resources. In this regard, emphasis is placed on the qualification, experience, and community service orientation of employees, with special focus on the loan officers’ credentials and their adaptability to the markets being served. Training and capacity-building programs form an important consideration, as ongoing investment in human resource development is deemed vital to support growth and maintain expertise. The assessment further incorporates the institution’s stage of evolution, including succession planning for key management positions, which is integral for long-term continuity. Board composition and effectiveness also carry significant weight, with evaluation centered on members’ sector familiarity, alignment with institutional mission, and the degree of active participation in governance matters. From a structural perspective, robust internal supervisory frameworks are critical, given MFBs’ and MFIs’ heightened exposure to operational risks. Standardization of policies and procedures, clear lines of authority, and transparency in operations are key rating considerations. The adequacy and quality of internal controls, internal audit mechanisms, and external audit practices are closely reviewed, alongside the institution’s adherence to regulatory requirements. B. (viii) Information Technology The need for developing an effective management information system is accentuated due to the volume of business that an MFB/MFI is required to monitor. The capacity of the system is determined with a view on its ability to manage future business volumes and its flexibility in handling new products. Utilization of MIS is gauged through the effectiveness and reliability of reports generated by the system facilitating the management in decision-making. Seamless flow of information within this complex structure is essential for business development and risk management. The management efficiency of an MFB/MFI is now tied up with the IT infrastructure or the IT platform which the MFB/MFI employs to
gather, disperse, analyse, assemble and store information for decision making. The range of IT infrastructure in MFB/MFI may vary from designer packages encompassing all activities of the MFB/MFI to a hybrid solution with some level of integration and some standalone modules. It is important here to assess the ease of flow of information between functions, diverse report generating capability of the IT system and the service efficiency of the internal and external sources in maintenance and development of the IT system. The IT security policies and disaster recovery plans are critical for IT system reliability and sustenance and would grow in importance as more branchless platforms are inducted into the MFB/MFI field. The capacity of the existing or planned IT platform to develop or assimilate such technology-based products is assuming greater importance, going ahead.

VIS
Credit Rating Company Limited vis.com.pk 8 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 B. (ix) Delivery Channels & Deployment Strategy Delivery channels and deployment strategy form the backbone of an MFI/MFB’s ability to expand outreach, mobilize deposits, and effectively serve its target market. The choice of delivery channel is driven by the institution’s business model and the nature of products offered, with branches typically providing both asset and liability products. The concentration of activity at a branch—whether deposit-focused or lending-focused—depends on local business conditions and the achievement of institutional objectives. VIS assesses the effectiveness of delivery channels by analyzing the relationship between branch network growth, deposit mobilization, and lending expansion. Trends in granularity and changes in deposit composition are evaluated to determine the strength of outreach and resource mobilization. Increasingly, the use of alternative delivery mechanisms— such as agent networks, mobile wallets, and digital platforms—is considered a positive factor, as it broadens financial inclusion, enhances cost efficiency, and supports scalability. Deployment strategy, in turn, is shaped by regulatory boundaries and the institution’s market orientation. In Pakistan, MFBs are restricted from large-ticket exposures and foreign exchange operations, which necessitates a sharper focus on retail borrowers and MSMEs. Within these parameters, deployment decisions are assessed in terms of geographic spread, sectoral exposure, and borrower profile. The nature of the target market—rural versus urban, agrarian versus services-based, or seasonal versus non-seasonal economies—is a key determinant of risk and sustainability. Geographic diversification across districts, provinces, or nationwide networks is viewed favorably, as it mitigates concentration risk and stabilizes earnings across economic cycles. From a rating perspective, institutions that align their delivery infrastructure with a well-calibrated deployment strategy—balancing outreach, efficiency, and portfolio quality—are positioned more favorably. The appropriateness of risk assessment tools relative to chosen markets, the integration of technology in delivery, and the ability to adapt deployment strategy to evolving market dynamics constitute critical factors in evaluating long-term sustainability.
C. EXTERNAL SUPPORT
C. (i) Sponsor/Donor Support
VIS believes that while the long-term self-sufficiency of an institution should be assessed without consideration for the potential of donor support, access to donor assistance, whether in cash or in kind, favorably impacts the ratings and constitutes a fundamental difference with conventional financial institutions. Donations may either be accepted as funds to be lent out, or for infrastructure development. As such, they not only serve as a cost free means of institutional development but may also assist the institution to tide over distressful times. Access to donor funds is dependent on the institution’s franchise value and reputation, reflecting donor confidence in an institution’s performance. MFBs having larger pools of the borrowing community and generally characterized by a relatively more extensive branch network, generally enjoy easier access to donor funds. VIS places significance on the strength and franchise value of the main sponsors. MFBs sponsored by the financially strong local financial and internationally operating microfinance institutions are likely to have tested risk management systems. The support from the sponsors is dependent upon a), the financial strength of the sponsors or the sponsoring group, b) the magnitude of the investment in MFB compared to their other investments and the impact of impairment of their investment in an MFB to the overall group. MFBs with single or two strong major owners would tend to fare better when

VIS
Credit Rating Company Limited vis.com.pk 9 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 support is needed than multiple major owners with variable financial strengths. Similarly, entry of a new major shareholder would need to be assessed on the basis of the value addition both, in terms of management and governance expertise it would bring, as also its financial strength. The extent of shareholding to be acquired by the new shareholder and the revisions of shareholding pattern would also be key considerations in determining the potential sponsor support. D. IMPACT ASSESSMENT The concept of microfinance is not confined to the extension of micro loans but encompasses the full range of financial and structural support services extended to the poor. Its central theme is the economic revival at grassroots level and therefore another aspect of an MFB’s/MFI’s strength is its impact on the population at large. It is important for an MFB/MFI to develop impact assessment tools to gauge its contribution to the society, either through skill development or general economic uplift. Though this does not impact the institution’s credit worthiness directly, it does have a bearing on the institution’s franchise value and financial access, thereby becoming an area of interest for the rating agency. Moreover, ESG considerations are becoming an integral part of credit rating analysis for the microfinance sector, reflecting both global trends and the sector’s developmental mandate. On the environmental front, the focus is on whether institutions support sustainable activities and avoid financing practices that negatively impact local ecosystems. Social factors remain central, with assessment directed at the degree to which services promote financial inclusion, empower low-income communities, and reduce inequalities. Governance is a key pillar, where transparent operations, ethical lending practices, and strong internal controls are critical in safeguarding long-term sustainability. It influences its franchise value and access to financial markets, making it an important consideration in evaluating overall institutional strength. RATING SCALE & DEFINITIONS Rating scale and Definitions may be accessed at (https://docs.vis.com.pk/docs/VISRatingScales.pdf)

VIS
Credit Rating Company Limited vis.com.pk 10 VIS Credit Rating Company Limited Microfinance NOVEMBER 2025 Information herein was obtained from sources believed to be accurate and reliable; however, VIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities. Copyright VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS. Islamic International Rating Agency – Bahrain – iira.com Credit Rating Information & Services Ltd. – Bangladesh – crislbd.com Japan Credit Rating Agency, Ltd. - Japan China Chengxin International Credit Rating Company Limited - China 128/C, 25th Lane off Khayaban-e-Ittehad, Phase VII, DHA, Karachi Tel: (92-21) 35311861-64 431, Block-Q, Commercial Area, Phase-II, D.H.A. Lahore - Cantt. Tel: (92-42) 35723411-13 www.vis.com.pk info@vis.com.pk VIS Credit Rating Company Ltd. DISCLAIMER Affiliates Karachi VIS House