Microlending to business is at the very beginning

MK-logospressEBRD in 2006 provided resources to two Moldovan banks, Mobias Banca and Banca Sociala, for lending to microbusinesses. This international financial institution also provided funds for technical assistance (consulting of recipient banks). This week we met Michael Kortenbusch, Managing Director of the German consulting company BFC that won the EBRD tender for provision of these services.

“In this case technical assistance is intended to establish a separate business line inside the bank,” says Michael Kortenbusch. “The major goal of this project in Moldova is to increase competition in this segment of financial services. Competition among financial institutions will improve customer service in terms of businesses’ access to cheap and easy-toapply-for loans.”

Michael Kortenbusch shows the latest statistical data on the development of microfinance in the eleven post-Soviet states. Moldova joined the program later than other countries, so the results differ. In the larger countries, the number of disbursed loans is in the thousands of hundreds, and the amount of funds disbursed is counted in billions of dollars. Even in the comparatively small Armenia, which joined the program in 2002, volumes of lending have achieved USD 115 million. Georgia formally joined the program in autumn 2000, but actual project implementation started in 2003. “The second stage is more successful than the first one. At present, over USD 200 million have been disbursed through 48,000 loans”.

Seven BFC full-time consultants have been working in Moldova for over a year. They assisted in setting up lending to microbusinesses in 14 branches of the two banks mentioned above. During the remaining by the end of the program nine months 10 more such “beachheads” will be established. “Today, there is no doubt that the program will not only allow the banks to effectively use the funds provided by EBRD, but will also expand lending from the banks’ own funds. 1,567 loans totaling USD 5.57 million have already been disbursed. By the end of the year, these figures will at least double. The two banks will have the largest and (we expect) also the most effective network of microlending divisions in Moldova”, says Kortenbusch.

“The starting conditions in the two banks selected by EBRD for this program were quite different,” Kortenbusch tells us. “Mobias Banca had previously been successfully developing retail lending. The principles of servicing retail customers and small enterprises have a lot in common. Hence, Mobias Banca already had some experience in business aimed at mass clients. Banca Sociala, in turn, already has some achievements to show. Specialized divisions have been established in its two branches in Ohrey and Komrat, and are working successfully. The large branch network of Banca Sociala leads us to expect that microlending will become one of its strengths.”

“When the institution called ‘ProCredit’ today was originally established, the niche for its operations was precisely defined,” continues Kortenbusch. “For many years, this lender did not feel any serious competition from commercial banks. This situation remains the same in many regions outside Chisinau today. It has not changed significantly since the time when I was managing MEC. Actually, lending to micro and small businesses in Moldova is not just a niche but a huge unexploited market. Out of ten clients who apply for microloans, only five at most have credit histories. Most of them had experience with ProCredit”.

No formal business plans should be demanded from a small borrower. Effective of lending to small business is based on the premise that the plan for use of a loan and the schedule for its repayment are jointly negotiated by the borrower and the loan officer. This is done at the “place of execution”, meaning that a representative of a credit institution carefully examines the business of a potential client — not by reviewing paper reports, but by directly visiting the site. Official borrower reporting is not emphasized. The assessment of a borrower’s capability is based on his or her business practices. The experience of the credit institution’s representative and his (or her) awareness of the small business environment in our country is the key factor under these circumstances.

It is necessary to mention the importance of the time factor when lending to microbusinesses. Data on the time spent by employees on preparation of a loan agreement, and review and approval of a credit application, is included in the internal statistical reporting of effective microlenders. Rapid loan issue affects not only the “customer value” and attractiveness for a client, but also directly reflects the productivity of individual loan officers and of the credit institution as a whole. “It is good when small loans are issued quickly, like hotdogs at a busy place. It shows that the lending technology is working well, and that the credit institution’s labor costs and overheads are at a minimum.”

Parallels with the sale of hotdogs can be found in many other aspects of microlending. One of them is the closeness to a potential client. The competitiveness of a lender in many respects depends on how closely it is located to potential clients. People may go to a restaurant which is located at the other end of a city, but they will buy a hot dog (or a bottle of beer) from someone who is nearby at that moment. In such cases, the price of the service is not a determining factor. Hence, credit institutions with a well-developed branch infrastructure have a competitive advantage in the fight for small entrepreneurs.

The ‘ideology’ of microlending to some extent differs from the ‘ideology’ of lending to medium and large businesses. Thus, according to our interviewee, the trainings provided by consultants for loan officers play an important role.

What is the difference between the ‘traditional’ approach to business lending and the new technologies used for working with small borrowers? In banks operating in the old way, not much is explained to a client. In such banks, the initial stage is usually limited to giving a client a list of documents which have to be submitted for consideration of his or her credit application. In the advanced banks, specialized consultants provide detailed explanations to all questions of a client. Usually, the smaller the client, the lower his understanding of credit technicalities. When intending to sell a loan to such a client, one should be prepared to patiently explain basic details.

“It is important for credit products to match the specifics of a microbusiness,” says Michael Kortenbusch. “For example, in the banks with which we are currently working, there is an agri-lending line of business. We had to develop completely new products for this type of borrower. Demand for these products is rising. Based on the experience of Georgia, a country similar to Moldova in many respects, I predict that these agri-loan portfolios will double every year for the next three years.”

We asked our interviewee about his assessment of the competition in microlending in Moldova, in particular from ProCredit and Agroindbank. “As far as Agroindbank is concerned, we are observing little overlap of its operations with those of the banks we are consulting,” believes Kortenbusch. “Moldova Agroindbank is quite successful with loan and savings associations operating in rural areas. It channels loans through these associations. In this area, Agroindbank (like some other Moldovan banks) acts as wholesale seller of credit that reaches the final customer indirectly. The specific feature is that the loans in these cases are very small — literally several thousand lei. Mobias Banca and Banca Sociala target a different segment, have direct contact with micro and small entrepreneurs, issue larger loan amounts, and also offer their borrowers complementary banking services”.

“Our advice regarding lending technology, risk assessment, loan officer recruitment and training is similar for each of the two banks,” says Kortenbusch. “However, when developing and branding specific products, our approach to each bank differs. The participation of the specialists and management of the banks themselves is crucial. Ultimately, we just remain consultants. The final decisions are taken by the banks. We share our experience based on work in twelve different countries, not just in the CIS, but also in Germany, Bulgaria, Pakistan, Bangladesh and China”.

According to Michael Kortenbusch, a specific institutional feature of the development of microlending in Moldova is the unique formalization and regulation of microentrepreneurship and lending.

“What is justified for large and even medium loan amounts seems excessive with regard to loans equaling USD 5,000–10,000. To give you one example, we have technology that allows us to define the real solvency of a client quite precisely, but we cannot formalize this data in order to present it to the regulating and controlling body. Because of this, commercial banks experience certain difficulties. But I would like to mention that the situation in this area is improving. For example, the National Bank’s move to permit the issuing of loans of up to 75,000 lei without collateral has significantly improved the environment for microlending. Currently, I hear a lot about market liberalization in Moldova. I think that could be useful.”

Alexander Takiy