We had a good meeting of the Financial Services Club in Vienna on Wednesday night for our Central & Eastern European (CEE) Group.
The meeting was in a cool place called the K47 Club …
The focus of the meeting was microfinance, and was interesting because talking of microfinance and microcredit in CEE is very different to microfinance in Africa or other emerging economies. This is because it is not so much community based, where a village or family borrow together to finance farming or basket weaving, but more based upon small loans to individuals and small to medium enterprises.
Hence, there is a concern amongst many of the financiers here that there is the lack of social community pressure to payback.
With the original Muhammad Yunus model of financing at Grameen Bank, the whole village would be liable for the loan you see. So if one person defaults, the whole village defaults. That puts an enormous pressure on everyone to play ball. With CEE microfinancing however, the money is based on one-to-one individual loans rather than community loans per the Grameen model
This does not preclude offering microfinance in CEE as it is a very successful model of business with many of the banks, such as Erste, moving into this area with Good Bee; but it does mean having strong management over risk and collections.
Ken Vander Weele, President of US firm Opportunity Transformation Investments (OTI), said that they had been operating microfinancial services across CEE for over two decades and gave several examples of how such services develop.
“In Montenegro we were making €1 million to €2 million loans to SME’s after several yearsk, as these businesses ramped up their lifecycles from micro finance to macro.”
That seems all well and good, but in the current crisis climate, will they payback?
“The real micro micros are running cash in the markets face to face, and their cashflows are still strong. It is the SME’s with €10,000 to €50,000 loans who are struggling.”
It was clear from the discussion that the more developed the economy and commerce is within a nation, the less likely you are to find a thriving microfinance community. This is why microfinance is not particularly burgeoning in economies such as Poland whilst in Southern Europe, especially in countries like Albania, it is an overwhelmingly strong trend.
This does not mean there is no interest in microfinance. In fact, many banks across CEE are showing Increasing interest in microfinance because of the success of the programs currently up and running, the profitability to be made from such offers and the higher interest rates on offer.
This is particularly the case in countries where loan sharks are raking the markets and a more trusted source of funding at lower cost is required.
That is why banks will ultimately own microfinance as a business because banks have the liquidity, the capital base, the reach and the marketing to make this a success.
For example Sava Dalbokov, CEO of Good Bee Holding which is a subsidiary of Erste Bank, said that banking penetration in Romania is covering just 40% of the population and that 99% of companies have less than ten employees, making it a good business for microfinance. This and similar examples in other CEE nations, demonstrate that Europe is behind here in banking the unbanked.
In the case of Good Bee, they teamed up with Wizzit the mobile finance operator from South Africa, to offer mobile payments and finance in Romania. But this leads to another dilemma as people now know that they can get money on their mobile phones, but they aren’t sure how to get money out of their phone. This means focusing on the next level of cash management with Good Bee teaming with Western Union and others to offer this capability across Romania.
And it is a good opportunity for the banks. As Pavol Kapsdorfer, Sub-Regional Manager at EDCS, made clear by underscoring that there are still “over a billion people living on this planet for less than a dollar a day.”
So who will win?
Probably large European banks over time. This is because the USA has been exiting the CEE region, because it becomes less relevant to the American firms interests as it develops, particularly as most of these countries see “the exit strategy is to join the EU. Once you’re in the EU, all the issues disappear and you become ‘normal,’ whatever normal is”, stated Ken Vander Weele of OTI.
This is why it was a good topic of conversation as the banks are keen on this space and will grow in their interests as regulators and policymakers push more and more for universal access.
If everyone must have access to a bank account by law, which some felt was likely in the future, then starting a microfinance, microsaving and microinsurance operation now will gain trust, growth, security and profitability when these services become mainstream.
That is certainly an area of interest of banks who are struggling today to find any source of new business.
But it is not just about offering a bank account. It’s about the training, delivery, structure and support of staff and the products that go with that.
This last point is a strong justification for banks to get into experiencing something related to microfinance right now if, for no other reason, than that experience can be gained anywhere from Bratislava to Glasgow to Alberquerque.
Meantime, we finished the evening with some lovely Weiner Schnitzel and wine …
Nothing micro there then …