Are the Prospects for Vietnam MFIs really bleak? Some Insights during a Strategic Planning Workshop

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What would you do if there are signs showing that your industry is moving towards sunset?   It was met with mixed feelings by participants to the strategic planning workshop for microfinance institutions.  The Credit Support Fund (CSF), a wholesale lending facility under the Vietnam Women’s Union (VMU) organized a training-workshop on strategic planning as part of its support to capacity-building of microfinance institutions in Vietnam. It was attended by participants from 10 MFOs, where only one has an existing strategic plan, three are in the process of formulating, and the rest has yet to draft their own strategic plans. The training-workshop was aimed at helping microfinance institutions develop strategic thinking and position their institutions for the future.

The strategic planning process is generally divided into four main activities, which includes the following:

  •  Setting the vision and the mission of the institution. This requires defining the reason for being of the institution, the clients they want to reach and the methods on how they can provide their services;
  •  The environmental assessment follows which focuses on the political, social, economic and technological developments that affect the operation of the institution. This part also includes looking at the industry and details on how competitors are doing;
  •  The internal assessment focuses the present capacities and resources of the institution to move forward and the direction that would lead to the attainment of its vision;
  • Identifying the strategic choices and the detailed plan where the objectives and the indicators are identified, the schedule of the activities are set, the monitoring mechanism is determined, and the people or the units involved in each activity are designated.

 Going through the first step, setting the vision, was easy. Everybody wanted to be sustainable and be the leading institution in their respective areas of operation. The mission statements were also unanimous which is serving the poor women and providing access to financial services to enable them to uplift their standard of living.

However, working on the assessment of the external environment raised issues that made the participants think not only about their future but the whole microfinance industry in Vietnam in general. The following issues are therefore considered “risk assumptions” that may affect the continuous operations of microfinance institutions in the country:

  •    Vietnam experienced consistent economic growth in the past several years, and the growth was coupled with declining rate of poverty.  As the country continue in its growth pattern and the poverty reduction measures become more successful, microfinance may become irrelevant several years from now.
  • Government poverty reduction programs are primarily with two government banks: The Vietnam Bank for Agriculture and Rural Development (VBARD) and the Vietnam Bank for Social Policies (VBSP). These banks provide subsidized loans to the agriculture sector and the poor in general. VBSP is even listed in the MIX market as the biggest microfinance provider in the country. Microfinance institutions cannot compete with these two institutions.
  •   Recent development in the rice industry showed a substantial number of farmers shifting to other crops as the price of rice keep going low. Most of the clients of microfinance institutions are rice farming families.
  •   The regulatory environment is slow in creating an environment that supports the development of the microfinance industry.  Of the than 50 microfinance institutions, only 2 are registered.

 Poverty reduction is of course a welcome development, but the idea of microfinance becoming irrelevant with the reduction of the number of poor people kept the participants thinking hard. If ever the trend continues, the question will be, are the microfinance institutions ready for that eventuality?

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Solar Home System: A strategic investment for Cambodian households

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In an article published in Cambodia Business Review (Issue 9, September 2013) titled Cambodia needs $1Billion to expand Electricity Supply, the energy situation in Cambodia was clearly explained.  Currently, the country is not generating enough power and has to source 45% of its energy needs from Laos, Thailand and Vietnam.  As a result, the price of electricity in the country stands at $0.15 – $1.00 per kilowatt-hour (kWh) and is considered one of the highest in Asia.  The country also has low electrification rate as only 26% of the households are connected to the power grid. In the rural areas, most of the people are using car batteries for light and small appliances.

As the article has stated, it needs more than $1B dollars to expand its electricity supply until 2030. The government has adopted the Rural and Renewable Energy Policy as part of the overall energy sector plan which calls for the tapping of all sources from crude oil generators   to hydroelectric dams and even coal plants. It has attracted investments from China, Korea and investors from other Asian countries. Despite massive investments, electrification of the whole country cannot be assured. The economic growth experienced by the country is expected to continue and will require a sizable amount of power. The power generated from the new dams and coal plants will therefore be focused first on the needs of the industries fueling the economic growth than for the household needs. Moreover, the environmental impact of the dams and the coal plants can affect the communities where these projects will be located.

The just concluded CamEnergy13 exhibit in Phnom Penh on September 10-12 was a timely activity. It showcased mainstream energy sources and alternative sources like biogas and solar.  The solar energy exhibitors featured solar energy products for industrial, home and even personal use: solar panels that can support factories, run a water-pumping station for irrigation; solar home systems that can power lights and household appliances; and even small panels that can charge cell phones.  The reality that the power grid cannot cover remote parts of the country can be answered by the availability of solar energy equipment that can provide more efficient and clean energy.

It is in this context that the program Cambodian SUN also becomes relevant. Integrating together institutions that will provide marketing support, technical service and financial service into one program assures seamless operation for the benefit of the clients.  Where previously clients are at the mercy of fly-by-night solar panel sellers, Cambodian SUN offers a full and customer-oriented service: high quality solar home system components, 24-hour call center, and regular visits of technicians and continuing education on renewable energy and other add-on benefits.  The program is spearheaded by PFTAS as the marketing arm, Kamworks as the technical service provider, and microfinance institutions as financial service providers. The latest participant to the program is the Vision Fund (Cambodia) who signed the agreement this month. Several other MFIs are invited to participate in the program to make solar home systems available to their clients as part of their social performance activities.

Cashflow lending: Towards more appropriate micro-enterprise loan products

There are two basic microfinance loan products – group loan and individual loan. Group loan scheme is used for very poor clients for them to have a support group, which also functions as the pressure group for defaulters, and to develop financial discipline necessary for a sustained financial access.  Individual loan scheme most often is provided for the “entrepreneurial poor” who has the capacity to venture into income-generating activities which we can call “livelihood activities”. These are simple buy-and-sell activities where the clients buy in bulk, place a mark-up and sell the products in the neighborhood or in areas with high foot traffic. Most of these activities are done by individuals and sometimes assisted by other members of the family including children.

 At certain point, some of the more enterprising among the clients move up and increase their volume of trading. Some enterprises evolve from livelihood to “micro-enterprises” – economic activities that exhibit growth potentials, that when given the right inputs and resources can become big. To sustain the growth, entrepreneurs have to transform themselves from a jack-of-all-trades to  managers with knowledge and  skills in inventory control, marketing, finance, and the other requisites of an enterprise. As the operation goes more complex, profit also increases that further motivates the entrepreneur to go on further.  Seizing the opportunity is the name of the game as the entrepreneur takes advantage of bulk sales, consignment from suppliers, and other marketing arrangement and balancing these with fast turnover of goods through credit sales, promotions and other schemes that ensures sales.

 At this point, one of the most important factors is cashflow.  Start-up and growing enterprises need cash to cover inventories, operating expenses to pay suppliers, workers and lenders.  The entrepreneur may need big amount at one time, but he can also have big cash inflows in another time which allows him to immediately pay back his loans. Effective cashflow management is one of the marks of an entrepreneur, and to have it, the entrepreneur need a standby source of cash, or credit that he can access every time there are cashflow concerns.

This is where the mismatch happens. Most of the loan products of MFIs are inflexible and still in the context of developing financial discipline as if  entrepreneurs are first-time borrowers. Despite the track record developed by entrepreneurs who are long-time clients of MFIs, they still has to contend with the standard loan features such as fixed amount, payments are in equal installments and made at regular intervals. The worst feature is at certain amount, hard collateral is required, limiting the amount that can be availed by the entrepreneur. The option for the entrepreneur is to borrow small amounts from different lenders to cover for his total cashflow requirement. This I think is a missed opportunity for MFIs.   With minimal skills in assessing enterprises, credit staffs are limited to determining the value of the collateral as the basis for the loan amount.  The danger of falling into the collateral lending trap was emphasized in the previous article.

 A more appropriate loan product would be cashflow-based with the following main features:

  •  credit-line type of loan with a maximum amount based on the historical data of cash requirement;
  • risk covering  is not  limited to hard collateral but a combination of  real estate, chattel, inventory and even collateral substitutes like savings;
  • fast processing of  draw down from the  approved amount;
  • business development services to enhance the skills of the entrepreneur are a must. 

Providing appropriate loan product should also be coupled with business development services to develop the soft skills of the entrepreneur. These skills will enable the entrepreneur to transform the economic activity from a livelihood to growing micro-enterprise and minimize risks as well.

The main skills that should be developed include but are not limited to the following:

  •  Basic management skills which covers how enterprises are systematically run. This involves skills in planning both for the short and long term; organizing different functions and delegating them to hired workers; and coordinating the overall operations.
  • Marketing skills which covers understanding the needs of the clients and aligning the products, doing market research, price setting and promotion.
  • Financial management and accounting to ensure that the funds of the enterprise are separated from the personal funds of the entrepreneur. Record keeping to develop track record for the formal financial institutions specifically for MFIs.

 In the end the assistance is an investment that will be mutually beneficial to both the MFI and the micro-enterprise client.