Kursiv.kz: MFOs expect changes in cooperation with the government

MFOs expect changes in cooperation with the government


How actively are microfinance organizations involved in government programs?


МФО ждут перемен в сотрудничестве с государством


Expansion of microlending is among five social initiatives announced in March 2018 by the first president of Kazakhstan Nursultan Nazarpayev. For this purpose, he has instructed to earmark 20 billion KZT. Correspondent of Capital.kz talked with Director of the Association of Microfinance Organizations of Kazakhstan (AMFOK) Yerbol Omarkhanov discussing how actively microfinance organizations are involved in government programs.

– Mr Omarkhanov, has the money mentioned by Nursultan Nazarbayev reached the sector?

– This money is intended to fund microfinance organizations which are established with government participation and provide soft micro credits. Operators for allocation of the said budgetary funds are different funds and special purpose vehicles. Therefore, it would be better to address this question to them. AMFOK brings together mainly companies of corporate sector.

– Does it mean that MFOs partially owned by the government are not included into the Association?

– There are a few of them in the Association, for instance Yrys, it deals with government’s business development programs. We have statistics. MFO Yrys was founded in 2009 and for a period of its activities until 2018 it extended loans for an amount of 34.107 billion KZT under 17,382 projects. The Association also has among its members MFOs established by Atameken National Chamber of Entrepreneurs, they also participate in implementation of these government programs. But it should be said that a small portion of private microfinance organizations is involved in implementation of these programs. In particular, one of the largest MFOs – KMF – has drawn down a credit in the amount of 250 million KZT provided by Damu Fund; in March this year, Toyota Financial Services raised major financing of 200 million KZT from Damu to finance purchase of motor vehicles by entrepreneurs. This is also done within support of local small businesses. Other participants of these programs are the following MFOs: Arnur Credit, KMF, RIZ Kyzylorda, Senim. These MFOs cooperate with Damu but there are also companies which cooperate with KazAgro, for instance, MFO Sator. Regretfully, we do not have general information about drawdown of money earmarked by the government for expansion of microfinancing because privately owned microfinance organizations are not actively involved in these programs. However, money allocated by the government  to support SMEs via members of our Associations has reached the market and has been effectively placed among a target group of borrowers.

– Are there probably reasons for that?

– First of all I would like to talk about MFO acitivities. They have a socially oriented profile, i.e. they finance the layers of population which, due to different reasons, are not appealing for banks and non-bank lending institutions, i.e. mainly rural residents. According to statistics, in 2018, 66% loans were extended in the rural area, while 34% in cities. Women accounted for 60% of the approved borrowers and men for 40%. And the money is borrowed for significant purposes, for instance share of microloans extended for business purposes makes 56%. Given that MFOs operate in a rural area where banks do not run their business, an on-line company needs a multibranch network of units with a trained staff in order to provide loans in small settlements. Moreover, apart from microlending, MFOs teach their borrowers basics of business operations and financial literacy, i.e. they operate directly in the field in close contact with the population. Large distances between rural settlements and maintenance of qualified lending staff which does not merely extend microloans but also directly deals with clients in close contact with them and teach them basics of business operations, affect a level of operating expenses of MFOs. After all, Kazakhstan has the 9th largest territory in the world with a moderate population density, remoteness of settlements, therefore expenses connected with extension and maintenance of microloans are high. In turn, the government is interested that self-employed population in rural areas and towns gains an access to cheap funding, therefore it limits a ceiling interest rate for borrowers. However, privately owned microfinance organizations given high operating expenses cannot allow themselves to participate in these government programs of SME support, although, in our opinion they could have allocated budgetary funds more efficiently since they have accumulated extensive experience in microfinance due to their trained personnel and necessary resources.

Also, MFOs, feeling special responsibility for allocation of budgetary funds for promotion of entrepreneurship,  dread consequences in case if a borrower defaults on its obligations, after all it is easier to risk your own money rather than government’s money.

Moreover, the bulk of them lacks collateral. The sector is divided into the first top ten MFOs and companies with a small charter capital where their only asset is a loan portfolio. Thus, they have nothing to give as a security in order to get funding from the government.

– And does the government demand this?

– Damu Fund has programs which allow an opportunity for unsecured lending but in that case MFO must have a high rating awarded according to an internal method of risk evaluation. But if we talk about SMEs they may not have it. Another reason why microfinance organizations cannot participate in government programs is a large volume of reporting. It is clear that since the money belongs to the government it requires close monitoring but this may affect efficiency of extension.

We’d most like if the domestic market of funding for MFOs is promoted in our country because the interest rates at which they currently raise foreign funds are very high. If there were a chance to raise funds on the local market at a lower rate, i.e. 10-15%, this would have favorably  influenced an interest rate for borrowers.

– Therefore, a question comes up concerning significance of government’s financing.

– Yes, of course, since it is in tenge. In such a manner we insure themselves against currency risks.

– So what should be undertaken to make government financing popular among MFOs?

– For instance we offer that the government subsidizes operating expenses of MFOs connected with extension and maintenance of microloans. Let’s take a program of efficient employment and large-scale entrepreneurship – Yenbek – which suggests that MFOs raise money for microleding at 1% and then lend the money to borrowers at 6%. And this 5% margin not only does not yield a profit, it also does not allow to compensate operating expenses. And operating expenses are high because MFOs operate in remote regions and in close contact with a borrower teaching him and carrying out quality monitoring of intended use of raised funds.

– Would you like to add anything else?

– We would like to get more information so that MFOs would be aware what government programs are adopted, run and what are requirements to eligible participants. The Association jointly with Damu carries out outreach activities among MFOs and we are very interested in development of the domestic market of funding.

– What are current requirements to MFOs to participate in the programs?

– As I have said, it is necessary to have security assets. By the way, due to our initiative the laws have been amended whereby MFOs can provide as a security their own loan portfolio to get an access to funding. We hope that the amendment will take effect this year. And there is one more detail, a borrower which raised money must be an IE or LLP or owner-operated farm, but the borrowers that borrow from MFOs are not always registered as entrepreneurs because of their humble income, for instance those that run little farmsteads selling meat, milk or fruits grown them without hired persons to maintain their life activities and draw humble income. Starting from this year, the self-employed portion of the population makes a single cumulative payment and legally carries out their activities. This category of citizens also needs financial support, promotion of an intrepreneur initiative. We have our own scoring methods and along with that quality of the loan portfolio is at a good level, where not more than 3.5% of loans are delayed for more than 90 days. I would like to point out that today ceiling rates are regulated by the National Bank, operations of the sector are active and stable.

Source: https://kapital.kz/finance/79000/mfo-zhdut-peremen-v-sotrudnichestve-s-gosudarstvom.html

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