Regular readers know we’ve been very interested in the opportunity created by microloans and microfinance. We’ve even funded a microloan account of our own, which is helping entrepreneurs from Nicaragua to Azerbaijan create new manufacturing businesses. A regular reader posted a comment to one of our recent posts that linked lean manufacturing methods to the success of microfinance.
Along those lines, (and your recent post on Kiva) reading Muhammed
Yunus’ book "Banker to the Poor" I found a definite lean streak.
Traditional banks were unwilling to help with micro loans to the
extremely poor simply because their administrative costs per loan were
too high. This is completely analogous to set-up time in manufacturing.
In essence, the banks were "batching" their loans to spread the
adminstrative costs across higher value loans.
Yunus solution was a banker’s equivalent of "SMED." There was more to
it than that, of course, (respect for people was pretty key) but by
changing the assumptions about how to "set-up" a loan, Yunus made it
possible to make hundreds of smaller loans at an affordable cost.
He was on to something. Just today the latest Knowledge@Wharton has an article on microfinance that describes some of the new methods and their associated efficiencies that had to be created in order for the industry to grow.
Let’s start with a quick story that demonstrates the power of microloans.
Avarzed [in a remote town in Mongolia] was a single mother with three children in school, barely
making ends meet by operating a small kiosk selling food and sundries.
Then she got her first loan; she used the US$80 to buy more goods to
sell in her kiosk. "I am grateful that someone trusted me, and I have
always tried to repay my loans on time because of this," she says.
Today, she is putting one child through university in Ulaanbaatar,
lives in a three-room apartment and owns her own shop. She used her
latest loan of US$6,000 to expand her stock, buying stationary and
Similar stories are happening around the world. Kiva, which leverages the power of the internet to connect donors with lenders who connect with people requesting microloans, funds a new loan every few minutes. That’s one form of efficiency. But as the commenter above mentions, the back office of the brick and mortar lenders must also change. The K@W article confirms this.
Mongolia is just one difficult environment where microfinance — the
business of providing financial services in small transaction amounts
to poor, underserved markets — has taken off in the past five years.
The Mongolian Central Bank "made some smart reforms in the late
1990s, which helped the banking sector really take off in the ensuing
years," says Ganhuyag Ch. Hutagt, CEO of XacBank, a Mongolian
microfinance bank. "Consistently high GDP growth, privatization of all
state-owned banks, lagging development of local capital markets and
foreign investment have all driven rapid expansion."
That’s a recurring theme: state-owned banks being privatized to leverage a free market push toward efficiency. But that’s not all. Competition breeds efficiency.
Even though the high degree of competition present in Mongolia these
days is unusual, the phenomenon itself is increasingly common in the
microfinance industry. In Eastern Europe and Central Asia, the number of institutions
active in microfinance stood at around 5,800 in 2006, most of them
credit unions established after the fall of communism.
Sharing best practices and bringing together all of the stakeholders.
Indeed, competition will be a theme addressed in this year’s 11th annual Microfinance Centre Conference
in Ulaanbaatar, Mongolia, on May 29-31. The event will bring together
microfinance practitioners, investors, donors, experts, consultants,
researchers, IT vendors, policy makers and media to address a number of
topics around the theme "Clients and Institutions, Growing Together."
And of course technology, like it or not.
Senad Sinanovic of Partner says his organization has also looked to
technology for competitive advantage. Besides beefing up its market
research capacity and lowering prices, Partner is utilizing mobile
phones to improve service — including sending greetings on customers’
birthdays — as well as new product offers.
Which is augmenting back office efficiencies, leading to performance improvements that can create cheaper, more accessible loans.
Banking sector non-performing loan rates remained quite low, standing
at 2.7% at the end of 2007. Enhhuyag stresses the positive results that
competition has had on the market: "In the past five years, loan rates
have been almost cut in half, while loan terms have increased by two or
three times, especially for herders," he says. "Banks serving the rural
areas have many obstacles to overcome, but their efforts have paid off
for Mongolia’s rural population."
To make money on microloans that are also customized for individual needs, lenders are forced to become extremely efficient. Pulled, one loan at a time.