10 Things to Know about Microfinance in Myanmar

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Photo: Myanmar Insider

There is an increasing interest in business in Myanmar as the country opens up its economy to the rest of the world. One of these is financial services, particularly ‘microfinance’ which has evolved from informal moneylenders and stereotyped “loan sharks” into a billion-dollar global industry with commercial investors participating, stock market listing and regulation by government agencies. With the establishment of the Grameen Bank in the early 80s, microfinance has since become an instrument in poverty alleviation, and in stimulating rural economies.

The potential for microfinance in Myanmar is huge. A large part of the country is still inaccessible and remote areas have no formal financial service providers. In most areas where financial service providers are present, many entrepreneurs are still not able to access the financial services necessary for expansion. Emerging enterprises are also left to scavenge working capital from informal sources that are expensive and unreliable. Recent emphasis on ‘financial inclusion’ and the proof that there is indeed wealth at the “bottom of the pyramid” has attracted commercial investors to venture into the microfinance industry. Traditionally this was the turf of non-government development organizations. For those interested in venturing into microfinance operations, these basic facts are important.

1. Opportunities in the microfinance industry abound

In November 2011, the Myanmar Microfinance Law was passed outlining the framework for the operations of microfinance activities in the country. It defines microfinance in the context of the country’s financial system and provides for the licensing and supervision of microfinance service providers. Microfinance institutions can provide the following financial services to its clients:

a. Credit
b. Savings deposits
c. Remittance services
d. Insurance services
e. Borrow locally and from abroad
f. Other financial services

There are two types of licensed microfinance institutions: deposit-taking institutions and non-deposit-taking institutions.
• Deposit-taking institutions are full financial intermediary institutions utilizing deposits from its clients to finance lending operations.
• Non-deposit-taking institutions provide loans from their own funds. In simple words, microfinance service providers operating like a bank.

2. Microfinance is a regulated industry in Myanmar

Myanmar is no stranger to financial crises resulting from bank failures. As such, regulation was among the primary concerns of the government when microfinance was allowed to operate in the country. It is necessary to ensure that ordinary people utilizing financial service providers are protected. The regulation of microfinance institutions was placed under the Myanmar Microfinance Supervisory Enterprise (MMSE) a newly formed agency, previously tasked with the management of pawnshop operations of the government. This is the agency that issues licenses to operate, monitor and supervise microfinance institutions. It is expected that there will be a harmonization of operations since the previous function of the agency was to manage pawnshops, while microfinance primarily requires the provision of non-collateralized loans. Compared to neighboring countries with vibrant microfinance industries like Cambodia, Vietnam and the Philippines, regulatory functions are vested with their respective central banks.

3. The minimum capital requirement to be licensed is modest

Among the requirements necessary for licensing, the upfront capital is the most crucial. Applicants for a license are required to deposit the following amount:
• For deposit-taking institutions: Kyat 30 million (approximately US$ 30,000)
• For non-deposit-taking institutions: Kyat 15 million (approximately US$ 15,000).
The amount may be substantial for local individuals and development agencies, but is meager for foreign companies and international development agencies with big budget programs.

4. Various types of organizations are allowed to provide microfinance services

Any legally registered organisations are allowed to operate microfinance services as long as they are able to get a license from the MMSE. These include local and international development organizations, partnership firms, cooperative societies, bank and non-bank financial institutions and partnership firms.

On the one hand, non-government development organizations can enhance its programs by adding these services and expect to become more sustainable and less dependent on donor funds. Whereas, profit-oriented organizations can channel financial resources into areas where it’s most needed and in the process help prime rural economies.

Currently there are close to 200 microfinance service providers in the country. In terms of outreach and loan portfolio, the international development agencies are the biggest. These include PACT, ACLEDA, MFI Myanmar, World Vision and Proximity. On a local level, coops make up the main bulk of licensed microfinance service providers.

5. The areas covered by current microfinance operators is still small

The biggest microfinance operators are present mostly in the Mandalay-Yangon-Delta “corridor”. Most parts of the country are still considered to be under-served financially, which means more financial service providers are needed. These gaps can be filled by expansion programs of existing players and/or new players.

6. Financial and technical support is available to microfinance service providers

Since microfinance is a nascent industry in Myanmar, support from donor institutions is available. International donor agencies are providing not only loan funds to microfinance services providers but also technical assistance to enhance the capacities of microfinance operators and even the regulatory agency. Among the institutions providing support to the industry and individual institutions are: the International Finance Corporation (IFC), European Union (EU), UNDP Capital Development Fund (UNCDF) and Asian Development Bank (ADB), to name a few.

7. There is an interest rate cap that may limit investment to the industry

One limitation in the industry is the interest rate cap which was pegged by the law where interest rate on loans shall not exceed 2.5% per month (30% APR) and the interest paid on deposits shall not be lower than 1.25 per month (15% APR). This policy may limit the institutions that will enter the market, experience in other countries shows that microfinance thrives best under a liberal interest rate regime.

8. There is also a cap on the maximum loan amount.

To maintain that the loans will be micro, the maximum loan amount to an individual borrower is pegged at Kyat 500,000. This may be considered low especially by micro-enterprises that need more working capital. Although in rural areas, that amount may be more than enough to start a small income-generating activity that will augment the financial resources of a family.

For microfinance service providers, the amount may be big for first-time borrowers, but for repeat borrowers and those that have expanded their economic activities through microfinance, the cap can become a handicap.

9. A microfinance network is being set-up

Major industry players have started initiatives at forming an industry association. A core group has started setting up the structure for the Myanmar Microfinance Network. Besides representing the industry, the network is aimed at promoting responsible finance. Among the global campaigns, it promotes social performance management (SPM) to ensure that microfinance institutions don’t drift away from their social mission. Another campaign is the promotion of client protection principles (CPP) to ensure that policies and procedures of microfinance institutions are not harmful to clients. Other advocacies of the network hopefully will cover improvement in the policies and regulatory framework.

10. Risks can be managed

Microfinance is a high-risk business and problems resulting from operations or the market environment may happen. Experience of how other countries responded will help in preventing the same happening in Myanmar. Among the risks that should be monitored closely are over-indebtedness, governance, management quality, credit risk and political interference. These challenges can only be addressed by industry initiatives and participation of all stakeholders.

 

First published in Myanmar Insider, Vol. 1 Issue 8, July 2014.

Sustainable Cooperatives: Alternative financial support systems for the poor

ImageAn emerging economic order

The ASEAN economic integration scheduled to be fully implemented in 2015 will have great impact on the people of the region. Designed to be a common production and marketing unit, goods and services will flow freely among its member-countries and will trigger a survival-of-the-fittest mode for businesses in the region. As competition provides lower prices and better products and services, benefiting the people, it will also weed out inefficient companies resulting in the laying-off of workers. Industries will consolidate leaving fewer surviving players to dominate the market. In this scenario, it is evident that the more developed member-countries of ASEAN will have a head start.

It is expected, but not assured, that the benefits of the economic integration will trickle-down to the marginalized sectors of the society. Definitely, a large number of people will be excluded in the process especially those coming from the less developed member countries. Growth rates may be observed, but it take some time before the poor will enjoy the benefits of the new economic arrangement. The poor will have to cope with these developments with minimal support. So far, there are no talks of safety nets for the poor, and it seems that everybody is thinking that there will be no massive economic dislocation as a result of this integration.

Left on their own, history shows that poor people coped during hard times by pooling their resources and sharing whatever they can to assist each other. These informal support systems still exist in poor communities and are evident in small self-help groups. It may be an informal collaboration at the start, but it can lead to a more formal and long-term arrangements like cooperatives. During the advent of the Industrial Age in Europe, people flocked to the cities in search of work but ended up being exploited as cheap labor. Poverty persisted and poor people were excluded, consigning them as commodities in the new economic order. The poor coped by forming self-help societies that later on became formal cooperatives. Raiffeisen cooperatives in Germany and the cooperative societies initiated by the Rochdale pioneers of England became models of cooperativism worldwide that has not only reduced poverty but have evolved to become major industry players globally.

Cooperatives as coping mechanism of the poor

What makes cooperatives successful? Basically it is the number of members. A big number of people pooling small amounts to generate a large working capital that will enable them to venture into enterprises which will not only serve the members but the whole community as a whole. Picture a scenario where thousands of poor people regularly deposit small cash amounts into a cooperative. The pooled deposits are then lent out to members some of whom are developing micro-enterprises. Those entrepreneurs will be able to expand their businesses and may even hire members who have no jobs. Income from interest payments of the borrowed funds will add to the growing fund of resources that will be available to other enterprising members. Financial services provide opportunities for members to venture into income-generating activities and contribute to job creation.

From the same scenario, the cooperative may venture into retail business of prime commodities. It can buy products in bulk and can offer lower prices to its members because of the savings generated from doing away with middle-men and avail of discount by buying in bulk. Invaribly members consume the products and services because they own the cooperative and it offers cost value. The sheer volume of small transactions will provide additional income for the cooperative.

The continuous and regular pooling of resources, the provision of financial services to members with entrepreneurial spirit and the establishment of basic services that responds to the needs of members builds up not only the financial resources but the institutional capacity of the cooperatives. As the cooperative becomes more efficient, it can assume more functions and businesses to serve its members and the public.

Cooperation does not only happen among individual persons because cooperation among cooperatives also takes place. It one of the basic principles of cooperativism – strength in numbers. This makes cooperatives one of the best mechanisms for economic inclusion. Giving the poor and the marginalized an opportunity to participate in the economic activities through cooperatives. Individually, the poor will have no say, but through a cooperative, they can be a player just as they are in other ASEAN countries with strong cooperative movements like Thailand, Indonesia and the Philippines.

Status of Myanmar Cooperative Sector

The growth of the Myanmar cooperative movement is attributed to the Ministry of Cooperatives, the government agency responsible for supervising and regulating cooperatives in this country. Its main objective can be summarized into two: first, to improve the socio-economic life of rural and urban people at grass-roots level; and second, to support with full strength by cooperative businesses for the development of the nation’s economy. Main activities of the ministry in promoting and developing cooperatives include cooperative development, small scale industry development, import-export enterprise development and the strengthening of the apex organization.

The Central Cooperative Society (CCS) is the apex organization composed of the all the primaries and syndicates in the region. As of 2013, the total number of registered cooperative primaries was at 20,658. It has total individual membership of 2,403,365. In terms of financial resources, total savings stands at 340Million kyats and loans outstanding at 1.1Billion Kyats. A large number of registered cooperatives are agricultural co-operatives in rural areas that are utilized as channels of support for agricultural producers. The rest are services cooperatives more prevalent in urban areas among the working class, providing savings and credit services.

The recent introduction of the Microfinance Law encouraged some cooperatives to register as microfinance service providers. In 2013, a total of 71 cooperatives were given licenses to function as MF (Microfinance) operators and is this is expected to increase as the regulatory framework for microfinance is being fine tuned. . The CCS was also allowed to operate microfinance operating units and set up branches to serve its members.

This is a good development as the presence of many cooperative microfinance service providers will promote financial inclusion and bring financial services to the doorstep of the members. It will allow people to enhance and increase their economic activities as working capital can be accessed from these institutions.

The challenges of sustainability

Cooperative development in Myanmar has a long history. With direct support from the government, it has survived domestic and regional economic crises. However, with the advent of free-trade arrangements and the gradual opening up of the country’s economy to the West it brings with it some challenges.

1. Increasing financial inclusion especially for those living in the rural areas

The total number of members in the cooperatives are but a small portion of the total population of the country. If we divide the total number of members with the number of registered cooperative primaries, it will give an average of 116 members in a cooperative. The urban cooperatives may have more than the average number, but rural cooperatives may have even less than the average number. Two challenges are evident: first, making these cooperatives bigger in number to generate more resources and transactions; and second, forming new and bigger cooperatives to cover areas that have no cooperatives.

2. Institutional development by enhancing skills of management teams

As the volume of members and transaction grows, there is a need to formalize and enhance governance and management systems. Volunteer work is not bad, but a fulltime and more professional workforce may have to man the cooperatives to make them more efficient and to meet the complexities of managing multiple services and ensuring membership care. An in-house training program that will ensure a pool of trained staff familiar with such operations should be coupled with management and executive training for the management team and policy-makers. The institutional capacity of the cooperatives has to be brought up to the same level of cooperatives operating in other ASEAN member-countries.

3. The need for matching funds

At the start, the pooled resources of the members may not be enough to provide for all the financial requirements of the members. As they gradually build-up their working capital out of the small savings and the incremental income for operations, there is a need to match these funds to hasten the development process. Matching funds, be it grants or soft loans, is ideal because it is founded on the concept that the cooperative has to first prove it can generate internal resources. The principle of cooperation among cooperatives will work best in this situation wherein inter-lending among cooperatives can be facilitated.

4. Social performance

Doing good is not enough, it should be ensured that there is no harm done to clients. Institutions providing financial services are doing good by providing opportunities to its clients, but they can also find themselves in a bind when they see clients mired in debt and still poor. Cooperatives and other institutions like microfinance that are founded on social services should have a built-in system for social performance management from the start. It should not wait until later or when mission drift is evident before corrective measures are installed.

Support to upgrade existing rural cooperatives and to organize new ones founded on a large base of membership, strong governance, skilled management and relevant products and services will provide the poor with a coping mechanism that will absorb the economic shock of ASEAN integration. It will also be the springboard for small and subsistence economic activities to develop into microenterprises and move towards small and medium enterprises (SME). Cooperatives are the most appropriate platform in developing a country’s agriculture and rural enterprises.

Published in Myanmar Insider, Vol. I, Issue 7, June 2014

 

The future of microfinance and the financial inclusion conundrum

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“Innovation” seems to be the buzzword nowadays in the microfinance industry. Articles with titles like “We need disruption in financial inclusion”(1)  or “How Big Data can expand financial opportunities for the world’s poor”(2)  or extolling the digital finance “revolution”(3)  are commonplace in today’s literature regarding financial inclusion.

The belief structure underlying this emphasis on innovation is that while “traditional” financial service providers serving the poor and excluded have expanded rapidly in the past 20 years, the 200 million clients they serve are just a drop in the bucket compared to the billions who remain unbanked. It is unrealistic to expect these same traditional service providers to close this gap because, by definition, traditional institutions are limited by both their brick-and-mortar structure and the fact that many seek to balance financial and social goals, which lowers returns and thus limits their resource generation capacity.

Financial Inclusion 2.0, in this vision, use technology to reach the unbanked. The two technologies most often cited are mobile/electronic banking and agent/branchless banking. Sometimes these two approaches are intertwined, such as when branchless banking networks are held together by mobile technologies. But while the assumption that technology will solve the gap in financial inclusion is explicit, what is not always clearly stated is who will wield this technology in service of the poor. The emphasis on “public-private partnerships” provides a clue. Often the only organizations that can afford the investment in the networks and technologies needed to manage them are commercial entities¬¬––ones without a specific social mission to serve the poor.

While it can be surprising to see for-profit companies or their associated foundations seeking grants, low interest loans and other support from development agencies to expand their business even though that business will generate profits for them, there is nothing conceptually wrong with purely commercially-oriented companies serving the poor––at least as long as these companies do not take advantage of the clients’ relatively low level of education and awareness to add in extra costs. The past decade revealed that even social mission-driven institutions were not always putting their clients’ needs first. This ultimately gave birth to the client protection movement. One would hope that the new, technology-laden entrants into the industry also abide by these same principles.

In fact, what is also implied in this emphasis on technology over traditional approaches is the belief that only purely profit-driven organizations have the capacity to raise sufficient resources to close the gap in financial inclusion. The traditional service providers, no matter how commercialized, are seen as limited in their ability to raise both equity and debt, mainly because they promise “social returns” that are perceived to cut into financial returns.

A lot of the cheerleading in favor of disruptive technology comes from Africa, where indeed mobile platforms have come to dominate payments transactions and expanded in to loan repayment and savings deposit services. Amidst all this hoopla, however, there is scant mention that the true lifeblood of any financial intermediary––loan origination––is still done the old fashioned way, through a face-to-face meeting between the loan officer and the client. Scoring and other technologies have been introduced, but to date have not been able to completely substitute for human judgment.

Africa may be unique because it had the least developed financial sector in the world 10 years ago. Asia has been a different story, with many long-established players. Perhaps this is one factor behind why three countries that are considered among the best sectors in the world––the Philippines, Cambodia and Pakistan––to date have not experienced “disruptions”, much less “revolutions”. To be sure, all three countries have witnessed significant effort to mainstream mobile banking and branchless banking. The Philippines has one of the world’s first joint ventures between a bank and telecommunications company (BPI Globe BanKO). In Pakistan, some MNOs have purchased or created financial institutions. Wing has been offering mobile payments in Cambodia since 2010.

And yet, in none of these countries does there seem to be a massive threat to the market share of the more traditional service providers that is leading them to seek their own technological solutions. If anything, most financial institutions are too complacent, sticking with their tried-and-true methodologies rather than trying anything new. For the most part, there are still so many unserved clients in all of these countries that there actually isn’t much pressure to change.

Perhaps these institutions are blind to the future. Will they eventually go the way of the dinosaur? To answer that question, perhaps it is best to look at what clients want. Do they want to be served by a local retail shop acting as an agent of a distant financial institution? Do they trust their phones to ensure their money is safe when they make deposits? Most importantly, do they prefer the no-frills approach offered by those types of “disruptive” players versus the social mobilization programs that usually come with services from social mission-driven institutions?

Some clients may indeed prefer the no-frills approach; not everybody wants to sit through an hour-long training each week. But if some clients want quick and easy access with no requirements like weekly group meetings, we should ask why they would choose a mobile or branchless banking channel when they already have no-frills, easy access service from their local moneylender. Sure, informal moneylenders charge a high nominal interest rate. But their importance in the lives of the poor cannot be underestimated; even in countries like Bangladesh, clients still borrow more from their local moneylenders than they do from their microfinance institution. Mobile or branchless banking can never be as convenient as the local moneylender¬¬––or as flexible. And the cost of the technology and need to have multiple partners to deliver the service does not necessarily give the new approaches a definitive price advantage.

Other clients may continue to value the personal relationship they have with their loan officer, who they see every week, and the training and support he or she provides. If that is what a large segment of the market wants, the traditional MFIs may be better off responding to the putative disruptive technologies by becoming more traditional, in the sense of going back to their NGO/project roots and combining financial services with other forms of support.

Unfortunately, it may be the case that the opposite will happen. The “disruptive technologies” narrative appeals to the worldview of many in Europe and the US, and this will have a significant impact on how much resources are available. These days, mobile banking, for example, receives enormous financial support from the development community, leaving less funding to improve traditional services through training of loan officers, mainstreaming of client protection practices and social performance management, or providing wholesale funds for on-lending. The long-term impact of this shift in resource priorities may be to act as a disincentive for traditional service providers to increase non-financial services.

Ultimately, resources in support of financial inclusion should be allocated toward services that the clients really want and need. Today, with so many decision-makers and commentators enamored with technological fixes, it is unclear whether clients’ needs are really being incorporated. The push for the technological approach continues despite the recent news that usage of both on-line and mobile payments services in the US has slowed for two years in a row , suggesting that even in a country where people readily adopt new technologies, when it comes to money most people still prefer humans over digits.

It is interesting to talk about the kinds of services clients demand and why, what this means for development at either the micro or macro level. These things will define how MFIs should position themselves in the future to meet their clients’ needs while remaining attractive to the investors who give them the money the use to lend to their clients.

__________

(1) http://www.theguardian.com/global-development-professionals-network/dai-partner-zone/disruption-in-financial-inclusion
(2) http://www.forbes.com/sites/realspin/2014/04/25/how-big-data-can-expand-financial-opportunities-for-the-worlds-poor/
(3) http://www.vanguardngr.com/2014/04/smes-developing-world-need-n320trn-ifc/

This article was contributed by Mr. Ron Bevacqua, Managing Director of PFTAS.

 

Financial Access to Small and Remote Communities

A.   

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       Microfinance borrowers in Nadi, Fiji, a nation of islands in the Pacific

       

        1. The challenge of serving small/remote communities

 

One of the main challenges in providing financial services to small and remote communities is the number of clients needed to generate a critical mass to have good profit.  It is simply saying

small population is equal to fewer potential clients.  Another challenge is the limited economic activities in a sparsely populated area.  A small buy-and-sell business trading business may not thrive in areas where neighbors are a kilometer away. To simply say it, lesser developed local economy translates to less demand for credit. In small or remote communities, the volume of transactions may not be large enough to generate profit to cover the cost of a branch.  The challenge for microfinance services providers then, is how to generate the ideal volume of transactions that will provide the profit to make the institution sustainable. 

 

There are two main methods to address the challenge of sustainable operations in small or remote communities: either increase the price of your products or lower your expenses to increase profit from your existing operations.  In the context of social performance, increasing price is not an appropriate action since the burden will go to the clients.  Lowering expenses therefore is the most appropriate action to take under current circumstances.

 

Lowering cost of operations can be done two ways: reduce your expenses, or shift expenses to others.  Reducing cost without affecting operation can be a headache for the management.  Most often, reduction in costs results to deterioration of service, and the clients often can observe these changes. When clients are not happy and the competitors offer better products and services, it would not take long before client migration happen.  Cost-shifting methods at this point are therefore the most ideal approach.

 

2.  The cost structure of a typical branch

There are three main functions in the branch which define the types of staff and the cost.  First is marketing: finding new clients, making new loans and projecting the image of the institution. If the institution is conscious of its social mandate, this is not easy since it should be ensured that you have the right clients. About 40% of activities in the branch are marketing-oriented.  Second is maintenance: ensuring that the clients used the money to its intended purpose, collecting repayment, conducting training and other non-financial services.  This function takes another 40% of the institutions time and resources. These two frontline activities are being done by the credit staff of the institution.  The remaining 20% constitute the backend functions of bookkeeping, cash handling and office maintenance.

 

Making new loans

Servicing existing loans

Handling cash

Support/sustaining activities

     Marketing and promotion

     Client identification

     Assisting clients to make loan applications

     Loan application review and approval

     Loan disbursement

     Loan utilization check

     Repayment collection

     Client monitoring

     Follow-up with delinquent clients

     Cashiering

     Bookkeeping/ transaction recording

     Settlement of books

     Monitoring and supervision

     General accounting and reporting

     Branch HR management (recruiting, training, etc.)

     General administration and maintenance

 

Based on these premises, the ideal approach to cost reduction is to look at how the frontline expenses can be reduced.  This paper discussed three approaches being undertaken by microfinance institutions. 

 

3.  Recent “innovations”: agent banking and mobile banking

 

Recent technological advancements provided two innovations which is being considered as the answer to concerns of outreach and cost reduction. Ideally, it is assumed that as mobile phones are becoming affordable, many people can acquire it and it can be a platform for the provision of financial services, reducing the costs related to staff salaries, transportation, food, accommodation and other field expenses incurred by the credit staff. Clients can then deposit, withdraw, receive loans and pay using their phones.

 

In a broad sense, AGENT banking is basically placing an intermediary to do some activities in return for certain commission based on the volume of transactions.  MOBILE banking particularly depends on technology (mobile or cellular phones) to do financial transactions. The matrix below provides some details.

 

 

 

Agent banking model

Mobile banking model

Branch cost reduction/ cost shifting strategy

Agent conducts:

     Repayment collection

     Some cash handling activities

     Some promotion (to walk-in clients)

     Disbursements (sometimes)

Clients bears transportation cost

Similar to agent banking model: telecom kiosks acts as the agent

 

plus

 

Some client monitoring can (theoretically) be done through mobile communication

Challenges

     MFI still bears largest operational cost (promotion, client identification, monitoring and follow-up) and the overhead costs that go with them.

     Agents need to be trained and monitored (additional cost to MFI)

     Agent incurs cost to enhance cash management capacity (security and access to a depository institution to manage liquidity

Similar to agent banking model,

 

plus

 

    Building and maintaining a working technology platform is an additional cost

    There will be two layers of fees rather than one (kiosk owner and  telecom platform)

 

The institutions who pilot-tested these innovations have shown that the clients used the platform mostly for money transfer and account checking.  Savings and credit however is not yet extensively used, especially in the South East Asian region.

 

Among the reasons why these innovations are not widely used are:

       a. Finding clients, especially the “target clients” remain with the MFI

           b. Maintenance is still with MFI,  and if  this is outsourced to an “agent”, the risk is higher

-and therefore the only function transferred is cash handling which is minimal;

-the agents are external to the MFI, and one issue will be the agents’ attitude towards the clients might be more “commercial” rather than “social”.

           c. There are additional costs – like training, commission, etc. 

 

Going back to the issue, of cost reduction, the present configuration of agent/mobile banking does not allow, or cannot ensure that the institution will reduce cost and ensure maintenance of its social mandate.

 

4.  The happy medium: shifting some costs but keeping the MFI involved

 

Let me emphasize that these are not new methods, and since it is there for all to see, we often miss it as we look for more “exotic” way of doing things.

 

Cambodia case study:  MFI sub-branch, a cost-reduction strategy

 

MFIs in Cambodia are registered as private limited companies and it has to pay the National Bank of Cambodia (NBC) for every branch it will set up.  The concept is: a branch is always a profit center. To be sustainable, MFIs should have branches that earns and contributes to the over-all profit of the institution.  Making each branch a profit center is the first objective of the institution.  It should have the right number of clients and loan portfolio that will generate profit.

 

Within the branch are the sub-branches.  Sub-branches are set up to target specific areas or specific type of clients.  Its functions are focused on marketing and maintenance of existing clients.  Backend operations still belongs to the branch where it is attached.  A sub-branch may not be earning at the start, but in the overall performance of the branch, its “losses” is offset by the income from other sub-branches. Some of these branches are set-up to cover specific areas where there are target clients like indigenous people, areas which cannot be reached by any transportation and other physical limitations.  Sub-branches therefore are used in reaching out to small and remote communities with minimal impact on the sustainability of the branch. As the sub-branch matures and the volume of transaction reached to a point where it can be a profit center in itself, then it can be registered as a separate branch.  

 

Philippines and Vietnam case studies:  a cost-shifting strategy

 

There are three types of MFIs in the Philippines: NGO-MFIs, cooperative MFIs and Banks with MFI functions.  This case study is focused on cooperatives with microfinance operations. Cooperatives in the Philippines are owned by its members who are also the clients.

 

In Vietnam the “social funds” are owned mostly by the Women’s Union. Funds of Women’s Union unit, either provincial, city or district are used to set up a social funds that will provide microfinance services.  To put it simply, the social funds are owned by the Women’s Union. Of more than 50 microfinance operators, only two are officially registered as MFI, the rest are social funds.

The essence of the Philippine and Vietnam cases is ownership.  The clients themselves are the owners of the institution. As such, some people within the institution assume functions that are “voluntary” in nature, that is, without pay. If paid, it is in the form of honorarium which is not fixed and regular.  In the Philippines a member-client may work as a committee member helping in the assessment and even collection, technically extending the reach and work hours of a paid staff.  In Vietnam, the local WU officers do the assessment, monitoring, and even running after delinquent borrowers.  For these volunteers, it is not about work, but for the strengthening of their institution.

 

As a result of these volunteer works, a big chunk of workload is taken off from the credit staff and allows him/her to do more work. Small and remote communities can be served  through these volunteers with minimal impact on the sustainability of the institution. The credit staff, relieved of most maintenance work can focus on the marketing function and become “volume drivers”.  In addition, time spent for remedial measures or recovery measures is lessened, resulting to higher efficiency and higher profit.  These volunteer works are not exploitative in the sense that it is an assumed responsibility of the client-members. As the profit grows as a result of the cost reduction, they share in terms of dividends for individual members in the case of cooperatives in the Philippines, and the increased fund of the WU in Vietnam.

 

5. Institutional sustainability: ownership (and SPM)

 

The concept of clients as owners is part of the progressive development process. In the early days of microfinance in the 80’s,  there was a call to refrain from calling the borrowers as beneficiaries because it is demeaning and patronizing, so in the 90’s up to now,  we call them clients. In the 21st century, empowered clients are aware of their rights and as they move out of poverty, the time will come to make them not only clients but owners as well.     With clients as owners, client protection will be easily addressed, and what will be more socially-relevant than a financial institution that is owned and managed by people it is mandated to serve.

Presented during the Pacific Microfinance Week celebration in Nadi, Fiji on October 21-25, 2013

 

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?

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.