Small Sums, Big Steps
Thursday, 7 April 2005
Small Sums, Big Steps
Gabi Thesing
Business and Finance Magazine
A Cambodian micro-finance bank owned by Irish aid organisation Concern is helping people to help themselves in one of the poorest countries in the world. Micro-credit enables individuals to borrow tiny amounts to start small businesses, and increase the economic return to their families.
AMK came out of Concern’s involvement in Cambodia. The Irish aid organisation had been working with Cambodian refugees in camps in Thailand. In 1993, Concern moved into northern Cambodia and started a number of aid projects, including a pilot model of savings and credit activities.
Ten years later, the savings scheme was separated from Concern’s activities, and registered as the limited liability company AMK. It is still wholly owned by Concern and its chairman is former PwC partner in Ireland, Tom O’Higgins.
The bank is partially funded by public finance bank Depfa, which originated in Germany and is now based in Ireland. Depfa donates E600,000 annually to Concern, which is then channelled into AMK. Depfa CEO Gerhard Bruckerman recently joined the board of AMK; the bank assists in the auditing and corporate governance side. AMK currently has $1.2m outstanding in loans and a savings balance of $3,498. Last year the bank made a net loss of $34,667, down from $61,458 the previous year.According to CEO Tanmay Chetan, AMK will break even in the second half of this year, or on reaching $1.6m in the loan portfolio.
THE STORY OF AMK
Credit union ideals at the village bank.
After years of oppression and devastation, Cambodians are beginning to see a pay-off from micro-finance organisations such as AMK. No collateral is required, but the borrowers have to organise themselves into groups of four to six, and it is these members who guarantee the loan. The maximum amount for the first loan is $50 with two subsequent increments of $25. From their third loan, they can apply for the maximum loan of $125. The bank also offers individual loans, which have to be backed by collateral, and the maximum loan is $500. The average first group loan per borrower at the moment is $38, while the average outstanding loan is $58.
AMK currently operates in 610 villages and has 20,502 active borrowers. Approximately 85% of borrowers are women, which tends to be a feature of MFIs across the developing world. Women are seen as more responsible with the money they borrow, and tend to employ it in ways that yield greater social returns. Often the women use the loans to open small stalls or shops in their local villages, saving the other villagers hours which they would have had to spend cycling or walking to the nearest market town to buy food or other necessities.
Even though the social objectives may be the primary reason for AMK’s existence, its chief executive Tanmay Chetan is adamant that he is still running a financial institution that has to grow and pay its way.
Chetan joined AMK from a micro-finance ratings agency in India, which should give him a good overview of how a microfinance outfit works – particularly if they operate within an underdeveloped regulatory framework. “The principles for other financial institutions applies to MFIs in pretty much the same way. A good MFI in my view is characterised by good governance, clear strategy, management systems, financial discipline and control, and a cohesive social objective that does not contradict the financial objectives.”
“Typically micro finance institutions originate out of Non-Governmental Organisations (NGOs), and there is a risk that the promoter NGO can thrust its own policies and personnel on the MFI, which may not suit financing operations. Since most NGOs are strong on development, but might not have the necessary expertise to handle a finance company, this can expose the institution to all types of governance related risks, including limited oversight on financial systems and control from the board,” Chetan says.
He is also strongly in favour of eventually cutting loose from the donor market and getting closer to mainstream financial markets. “This is often a huge challenge for MFIs, especially when unrestricted donor funding is available in most countries. Continued reliance on free money often takes away the financial rigour that a mainstream bank would need to adhere to. Also, NGO-promoted microfinance institutions need to keep their development work separate from the microfinance programmes, which otherwise confuses staff and clients.
“Often the very poor don’t need credit, but perhaps other health or educational support. In such situations, NGO microfinance operations can harm their clients by pushing loans, even though their intentions may be noble.”
Noble intentions aside, compared to western standards, borrowing from AMK does not come cheap. At 3% interest a month, the APR runs at a whopping 36% over a year. Yes, clients may only borrow for a few months and pay back the loan immediately after the harvest, and yes, it is expensive to give out only small loans and send a loan officer dozens of miles on a moped down a dirt track, but is it not a valid criticism that the interest rates may be a bit excessive?
“Micro-finance needs to be conscious of cost control. However, if viewed in the context of loan sizes, and infrastructure and communications costs, a well managed MFI will still have a 34%-36% cost ratio on performing assets. Thus, an interest charge of 3% will enable them to just about break even. At field level, low-cost operations for us broadly mean that each credit officer handles about 600-800 clients, or a loan portfolio of over $35,000. At this level, we make an operating profit before taxes. With improved systems, we were able last year to double our loan portfolio with just a 20% increase in the number of credit officers. Our costs lie mainly in taking the bank to the people and dealing in very small amounts. Our loan sizes are the lowest in Cambodia, and that pushes up the costs of lending.”
The irony is that the normal laws of competition apply just as well in rural Cambodia as they do in Dublin, London or Berlin. A number of AMK borrowers have confirmed that the dreaded money lenders have lowered their interest rates down to 4% a month – from the previously crippling 10-15% a month – since the arrival of AMK in the village.
While micro-finance may not cure all the ills of poverty, Concern says it unleashes the creativity and entrepreneurial ability of the poor. One may be surprised to find a role for microfinance in the developed world. However, for obvious reasons the scale will be different. Micro financing has been defined across Europe as the provision of loans up to €25,000.
Often referred to as the lenders of last resort to entrepreneurs without collateral or a bad credit rating, these agencies plug an important gap in the provision of seed capital for the SME sector. In Ireland, First Step is plugging that gap, however, anyone under the impression that this is free money, and that the application process may be less onerous than that of a bank, is mistaken. First Step’s ebullient chief executive John Cranfield makes no bones about the fact that about half of all proposals are turned down – not because the applicant is not creditworthy, but because the commercial idea is not viable.
First Step currently loans to approximately 160 entrepreneurs a year, and Cranfield has already seen an increase of 10% on this figure this year. “The mainstream banks will not support any kind of risk and have seriously upped the bar on lending. So many of the banks actually send the applicants to us.” First Step was set up in 1991 by a group of businesspeople who were put on the spot by Norma Smurfit, who wished to know what said group was doing about the 17% unemployment rate in Ireland. These days, First Step is not about eliminating poverty, or helping those whocan’t get a job to set up a business, but to stimulate enterprise and small business. “While I am all in favour of the Intels and the Dells of this world, the driver of the EU economy is the SME sector. There are 22 million small businesses in the EU, 93% of which employ less than 10 people,” Cranfield says.
