Introduction
As part of the education process, mandatory internship was conducted in Kyrgyzstan in one of the biggest microfinance organization - FINCA.
Kyrgyzstan is one of the poorest countries in Central Asia with the level of poverty of more than 40 percent.
FINCA International, Inc. created its program in Kyrgyzstan in 1995 in order to provide poor but potentially economically active people of Kyrgyzstan with small loans needed to either start up or expand their businesses. Following the FINCA model, FINCA Kyrgyzstan has been primarily targeting clients in remote underserved, mostly rural areas with no or poor access to credit, as well as very small entrepreneurs in semi-urban and urban communities, who due to very small business volume and lack of collateral, had no access to credit either. Since its inception FMCC has focused on client growth, geographic outreach, financial sustainability and institutional development. In an effort to formalize its operations, in July 2003 FINCA's program in Kyrgyzstan was incorporated as a joint stock company under the laws of Kyrgyzstan, taking the name "FINCA Micro Credit Company" (FMCC), and certified to operate by the National Bank of Kyrgyzstan.
FMCC has two shareholders (FINCA International, Inc., and FINCA International LLC).
FINCA International Inc. (99.99% share) is a not-for-profit corporation organized and existing under the laws of the State of New York, USA. FINCA International Inc. has received tax exempt status under section 501(c) (3) of the Internal Revenue Code. It is comprised of four Members and a Board of Directors of 17 members. In addition, it has an Executive Committee, an Audit Committee, and a Compensation Committee. According to the US legislation, not-for-profit corporations may own for-profit entities.
FINCA International LLC (0.01% share) is a limited liability company organized and existing under the laws of the State of Maryland, USA. FINCA International LLC is wholly owned by FINCA International, Inc.
In 1995, it was not possible for FINCA to create a local non-governmental organization due to the limitations under Kyrgyz law. As a result, FINCA opened its office in Bishkek as a branch of FINCA International, Inc., doing business as FINCA Kyrgyzstan. Start-up operations were funded with a USAID grant. This grant agreement fell under the jurisdiction of a bilateral economic assistance treaty governing development assistance between the U.S government and the government of Kyrgyzstan (GOK), and thus provided FK with an exemption from local registration and taxation during the period of USAID support.
Company overview
Since the time FINCA Kyrgyzstan was launched in Bishkek in May 1995, it has expanded to nation-wide coverage. FMCC is present in all seven regions of the country: Batken, Chuy, Jalal-Abad, Naryn, Osh, Talas and Issyk Kul running a network of 17 branches and 69 outlets as presented below:
As of today FMCC positions itself as a truly microfinance institution serving the lowest market segments and the remotest feasible areas. FMCC successfully competes both with downscaling commercial banks in the urban and semi-urban areas when they enter lower SME market segment, and with other microfinance institutions both in the urban and rural areas. With its active clients base of over 108,000 FMCC is the largest credit provider by outreach in the country of all.
Table 1. FMCC portfolio development
(Figures in USD)
2006
2007
2008
2009
June 2010
Village Banking Clients
32,594
56,384
79,410
94,269
93,920
Micro Clients (Individual)
5,110
7,612
11,276
13,833
14,263
Total Clients
37,867
63,996
90,686
108,102
108,183
Portfolio Outstanding
18.4 m
33.7 m
50.5 m
49.7 m
48.7 m
PAR >30
1.69%
0.92%
0.57%
0.57%
0.71%
Operational Self-Sufficiency
139%
130%
125%
123%
117% (YTD)
Financial Self-Sufficiency
106%
108%
107%
121%
114% (YTD)
Number of Branches
6
13
14
17
17
Total Staff [1]
458
602
738
846
918
Challenges in early years
FINCA has faced three major challenges in its early years.
First, client withdrawal has remained stubbornly high, slowing portfolio and client growth. Surveys revealed that the inflexibility of the group lending loan product was partially to blame. During the past several years, FINCA spent much effort on innovating its group lending model to better meet its clients' needs. Today, FMCC's group lending product is one of the most progressive in the FINCA network.
The second major challenge has been high inflation, high interest rates and periodic devaluations that have frequently hurt FINCA's real asset and equity growth. It should be noted, however, that in the last three years the Kyrgyz economy has stabilized significantly (about recent events in 2010 we will talk later).
The third major challenge has been competition from downscaling banks. To date, FINCA has focused its efforts on dealing with competition by providing better services.
Legal structure and regulatory regime
In June of 2003, FINCA incorporated a joint stock company, the FINCA MicroCredit Company (FMCC), under the laws of Kyrgyzstan. Shortly, thereafter, FINCA received a certificate from the National Bank to operate the FMCC as a microcredit company with branches throughout Kyrgyzstan.
CJSC "FINCA MCC" acts under the Certificate issued by the National Bank of Kyrgyz Republic as of July 22, 2003, Reg.No 8.
Law on Microfinance Institutions of the Kyrgyz Republic was adopted as of July 23, 2002. The Law regulates the procedures of organizing, operating and liquidating the microfinance institutions in Kyrgyz Republic; specifies the operation types that can be used by microfinance institution.
Therefore, FMCC activities are regulated and overseen by the National Bank of the Kyrgyz Republic.
Market strategy
FMCC has long-term objectives. In the nearest future FMCC is planning to transform into bank in order to provide wide range of services to their clients. The rationale behind establishing a full-fledged FINCA bank in Kyrgyzstan is further development of FINCA 12-year credit only activity in the republic, satisfying its clients' growing demands in savings and remittances.
FINCA's strategic plan includes the following elements:
1. Increase client base to 150,000 and performing loan assets to $100mm by December 2012.
FINCA will continue to deepen its penetration in existing markets by opening new rural branch offices to bring services to hard-to-reach rural populations.
2. Improve and enhance credit products to meet client needs.
FINCA has tailored its village banking group solidarity product in Kyrgyzstan so that it is perhaps the most flexible and progressive village bank product in the FINCA network, provides both collateralized and uncollateralized individual business loans, introduced agricultural loans in 2006, and plans on implementing various innovations and new products in the coming years.
Introduce non-credit products and services to meet client needs.
FINCA plans to implement current account and deposit services, as well as domestic and international remittances.
4. Consolidate product and service distribution.
FINCA is pursuing an aggressive expansion plan within the rural areas of Kyrgyzstan to tap into unmet demand for financial services. As part of this for this network to be efficient in its outreach, each office must have internet access and must be linked into the MIS at FINCA's head office in Bishkek to enable daily reconciliations of financial data and portfolio tracking. The rural offices combine the use of modern technology such as the internet and updated MIS with a minimal institutional infrastructure to allow for sustainable offer of financial services to rural and agricultural entrepreneurs.
Loan portfolio
Since its inception, FINCA has offered two basic credit products to poorer entrepreneurs within the community: Group Solidarity Guaranty Loans (SCG) and Individual Small Enterprise Loans (SEL). A Group Agricultural Loan product got introduced in April 2006 followed by an Individual Agricultural Loan product in July 2007. Now Agro Loans All loan products are business-oriented by their nature.
The following table shows proportion of each product type in terms of number and volume.
Table 2. Proportion of loan products
Type
Number of loans
Volume of balance
Group
40%
30%
Agricultural
48%
28%
Express Individual
9%
15%
MSE loan
2%
27%
Total
100%
100%
Group Loans and Agricultural Group Loans. These types of loans operate under group solidarity guarantee, therefore no collateral requires. In order to get the group loan, there should be at least 4 members in the group. Loan term is up to 12 months with monthly, bi-weekly, weekly repayments. Interest rate varies from 3,0% to 3,7% per month and additional fee is 1.8%.
Individual Loans. There are three types of individual loans: Express, Microcredit and Agrocredit with the loan terms up to 36 months. For individual loan collateral is required, this can be guarantor or assets of the client. Interest rates vary from 3,1% up to 3,5% per month depending on the loan amount requested. Also additional fee of 1,7% is applied.
It takes up to three days for all group loans and up to five days for all individual loans between client's first contact with FINCA and disbursement of client's initial loan.
Company's interest yield on loan portfolio was 42% in 2009. This year portfolio yield ratio stays at the same point. Effective interest rate for individual microcredit loan has significantly decreased in the previous years, from 66% in 2007 to 44% in 2009.
The initial loan size and the rules determining how much the loan amount can increase for repeat loans.
The company does not determine the strict amounts on loans that should be disbursed if a client applies for loan first time or for further subsequent loans. Each loan product has its maximum amount (cap) over which they cannot be disbursed to any client at any circumstances (Table 3).
Table 3. Maximum loan amount
Loan per client
Max loan amount (Som)
Equivalent Max loan amount (USD)
Group business loan
80,000 soms
$ 1,730
Group rural loan
60,000 soms
$ 1,300
Individual business
1,000,000 soms
$ 21,500
Individual agro
400,000 soms
$ 8,600
Loan amount to be granted to a client depends on the client's business profile, income generation capacity, and risks associated with his business and household. Clients may or may not receive higher loan amounts while having subsequent loans from the company.
As for the ratio of Portfolio at Risk (PAR), the dynamic of it can be seen in Section 1 of this paper. PAR30 from year to year is very low, less than 1%, which indicates good operational work and overall institutional organization of the business.
Recent events in Kyrgyzstan in April, May and June 2010 significantly influenced on loan portfolio of the company. It's estimated that PAR>30 will be more than 5% as for July 2010.
Results of the internship research
FINCA Kyrgyzstan is in the process of implementation new products. There are some challenges that company confronts during this process, among them is legislation factor and transition of the company to new MIS system FlexCube and current situation in the country, which postponed the implementation of the product right now.
Nevertheless, FINCA was extremely interested in conducting extensive research among their client in order to identify preferences and needs of existing clients in new products.
Therefore, during the internship, in July 2010, research on remittances and savings was conducted as part of the internship responsibilities.
Detailed description of the study was presented in the Master Thesis. Here are some findings and observations of this research.
Every second client has relatives who live abroad and seventy-eight percent of these clients do regularly receive remittances from them. We suspect that this percentage might be even higher, as there may be some percentage of clients who were afraid to declare the fact of receiving remittances because of the fear of taxes or status issues among the community.
Expectation and intention of the following year's (2010-2011) migration among clients, their family members were quite high (69%). Among those who intend to migrate the following year, the main obstacle to do so - is the shortage of money, savings, to have as initial capital when emigrating. Internal and external migration is one of the consequences of the incidents happened in the South of Kyrgyzstan.
It is interesting to note that the majority of clients (81%) who receive remittances indicated that these transfers were made and received mainly through MTOs.
Only about 3% of respondents had active deposit accounts with banks, however more than half of the clients would like to open savings account. If we combine the fact that only 3% of respondents are actively saving with a bank, but that 52% of them would like to open deposit accounts, our research suggests that there is significant unmet market demand for savings products. Research showed that because of the current unstable situation in the country, people do not trust banks even more and not eager to open bank accounts and save in the banks. Moreover, it also suggests that banks currently do not offer savings products that appeal to microfinance's client base-the working low income.
Fifty-seven percent of respondents suggested they would like to open a savings account with FINCA/KG and deposit money, this percentage is slightly higher than the general willingness in opening savings accounts, which leads us to reasoning that clients trust FINCA, thus non-banking financial institution - MFI, more than banks in general, as more clients would open a savings account with FINCA than with any financial institution in general.
Of all savings products, the most popular savings products included: 1) accruing deposit accounts, 2) fixed term savings accounts and 3) on-call deposit accounts. However, we observed that when it comes to defining what kind of savings account the client wants to open, they do not understand the general terms, which shows that there is a lack of financial education and financial literacy among the low-income population.
Sixty-three percent of respondents claimed they could make monthly deposits, but the amount is relatively small ($ 25), which is another reason why clients do not open bank accounts.
The vast majority of the remittance receivers among the clients (63%) suggested that they would probably consider investing money, deposit part of the remittances into savings account.
The client's survey revealed that FINCA is banking the unbanked, as about 80% of respondents received their first loan ever from FINCA, and heard about it through word of mouth. This parameter is important in product design: any new product should be simple enough for clients who are new to the formal financial sector to understand. At the same time, we note that there is a significant drop off in retention after 3 years, highlighting client fatigue. This is an issue that can be ameliorated by offering wider range of products, among them remittance services and savings.
This survey and analysis of the results are basis for further identification and assessment of strong and weak positions of FINCA.
Influence of unstable political situation on the company
Before and during the internship military coup and ethnic clashes took place in Kyrgyzstan [2] .
Situation in the country directly affects the company's activity. Therefore, the internship was mainly concentrated on issues related to this aspect. Among my duties was observation of the current situation in the country and how it can affect the company's profile. Especially it was related to the analysis of the client's performance, PAR and loan restructuring. Thus, here are some observations related to this issue.
After the events, the whole company is concentrating their attention for controlling loan portfolio and identifying clients who suffered from these events, loan officers are visiting clients to assess their current situation. The programs in Osh and Jalalabad branches stopped working and making disbursements for more than 10 days.
External and internal risks not only increased but also became true - after the tragic events happened in the southern part of the country (Osh, Jalalabad, Bazarkorgon cities) the portfolio at risk increased from 0.68% (as of June 6) to 7.53% (as of July 23, 2010).
As of end of July 2010 more than one thousand clients (414 group clients, and 244 individual clients at least) have been affected by recent clashes. Most clients have not yet been located, and many are reported as either missing or displaced to other regions, including Uzbekistan. Staff is currently developing an approach to revise and restructure loans for clients directly impacted by the violence. Committees on restructuring loans take place every day.
From June 11 to June 25, 2010, due to the difficult situation in the South region, the company had postponed repayments for 9 branches that amounted to more than $1ml. Total amount of overdue loans in those branches amounted to more than $2ml.
Credit risk occurs due to the tragic events in the South. Non repayment affects the following:
Substantial deterioration of the clients' solvency and credit security. Conflict zone abounds with human tolls; both small, medium businesses and residential sector have suffered damages. Social tension and distrust among conflicting people continues, therefore curfew is still going on from 22:00 to 5:00. Criminalization of the society may be observed.
Forced migration of people including company's active clients. Tragedy happened in the Southern part of Kyrgyzstan brought to one of the consequences, which is increase in internal and external migration. People try to leave the conflict zone, probably including FINCA's clients.
Difficulties in the loan portfolio administration as a result of security threat, which is still available during the clients visit for monitoring/social and economic condition check purposes.
Internal and external migration is one of the consequences of the incidents happened in the South of Kyrgyzstan. People try to leave the conflict zone and company's clients may be among those people. According to available information, air tickets to the cities in Russia are sold out for months ahead. Not only conflict zone was affected by relocation, it also happens in other areas where conflict is possible. 9 of 17 branches are located in the South of Kyrgyzstan. 50% of the credit portfolio and about 45% of the clients belong to those branches. For now on, financial and economic analysis prior to the disbursement should consider all available risks of non repayment, including migration, as such risk has grown considerably due to the last events.
All these factors may lead to:
Increase in overdue cases due to insolvency of entrepreneurs, that is loss in loan portfolio
Decrease in amount of lending due to reduction of demand on loan resources and increase of non repayment risk and as follows decrease in company profitability
Conclusion
Kyrgyz microfinance sector is very competitive and widely presented in the country. Main part of the internship was supposed to be involvement in the market search for FINCA's need in order to implement new products. However, due to political situation in the country, my internship tasks were concentrated not only on the research, but on activities related to stabilization of loan portfolio of the company and on following potential companies risks
This internship greatly contributed to my professional and learning experience, due to complex involvement in the company's operational and financial activities. Except for research conducted for master thesis, field visits, analysis of the client's financial and socio-economic performance, participating in credit committees and committees on restructuring loans, loan expert's trainings, fraud investigations, analysis of main players in the microfinance sector of Kyrgyzstan, financial analysis and risk management of the company were among my professional experience.
As my personal remark about the country, once again it was observed how significantly can be different rural and urban parts of country. The life of country should never be judged only by its capital.
