Facilitating Growth of SMEs through
Introduction of Non-bank Financial Institutions
as Alternative Sources of Financing
Presentation at Hyatt Hotel
8 November 2013
Caroline Tsilikounas, CEO
AgroInvest Serbia and Montenegro
Introducing AgroInvest
AgroInvest is a Microfinance Institution (MFI) created in 1999 that
serves the financial needs of the rural population and rural microenterprises in Central and Southern Serbia. Our financial services
support the economic development of the rural population that
lack access to credit. We specifically cater to those who are not
eligible to borrow from banks.
AgroInvest is an affiliate of California-based
Vision Fund International


What is Microfinance?
• Microfinance is a term that describes the provision of lending
services by poverty-focused institutions (MFIs) to small enterprises,
startups, or rural populations that are not served by mainstream
financial services providers. These are usually not banks.
• The importance of microfinance lies in the fact that it provides a
model of development that promotes entrepreneurship and
gives people the means to fight poverty.
• In many countries, non-bank microfinance is provided under a
separate regulatory framework than banks. In Serbia, there is not
such a framework and so MFI’s must lend through banks.
Geographic Coverage
AgroInvest in Serbia today operates
in 18 offices and one head office, and
serves the needs of 15,000 rural
families. We are externally audited.
Key figures September 30, 2013
Gross Portfolio (EUR)
9.54 million
Write-off Ratio
(annualized)
0.8%
Portfolio at Risk > 30 days
1.92%
Number of clients
15,388
Areas of Operations and Results –
September 2013
# of Households
# of Rural
Households
Rural / total HH
3:2
(%)
1
2
3
4
5
7
Region 1 Cacak-Užice
140,838
64,235
46%
1,714
2.67%
Region 2 Kraljevo
48,721
23,437
48%
2,311
3.12%
298,267
137,138
46%
2,668
1.95%
265,350
120,350
45%
1,746
2.51%
135,013
70,741
52%
2,318
3.28%
99,700
55,834
56%
1,705
3.05%
64,514
31,815
49%
1,559
4.90%
194,425
118,105
61%
1,362
1.15%
50%
15,383
2.47%
Rural Regions
Region 3 KragujevacJagodina-S.Palanka
Region 4 KruševacAleksinac-Zajecar
Region 5 LeskovacVranje
Region 6 PirotProkuplje
Region 7 N.PazarRaska-Prijepolje
Region 8 LoznicaValjevo
AGROINVEST
1,246,828
621,656
Rural Market
September 2013 Penetration 5:3
Clients
(%)
AgroInvest Target Group
Survey: we conducted a Social Impact “PAT” Survey (USAID methodology) conducted in
17 AgroInvest Serbia branches, with a sample of 400 randomly selected AIS clients.
.
Poor population
Very poor
Findings: 90% of AI’s households have an income below RSD 29,000.
This supports AgroInvest’s target group criteria – (Gross monthly income less than 500
euros (net EUR 355) or less than EUR 100 per household). The Average income is RSD
39,197 in Serbia (EUR 348). Minimum income is RSD 18,400, i.e. EUR 164.*
*Source: Serbia Statistical Data
Why are we Different from Banks? (1)
Of our total 15,000 active clients, credit bureau sources indicate that only
10% of them have access to bank loans - our target group is different.
In the areas of Cacak, Užice and Kragujevac, among others, banks do not
provide loans to unregistered farmers or start-up SME’s, because of NBS
provisioning requirements and predominance of low-income clients.
Market
No of
Rural
Rural/
Population Househol household total HH share
ds
s
2012
Market
share
Sept
2013
Satellite
offices
Municipalities
Čačak
Čačak, Gornji Milanovac,
Lučani, Ivanjica
218.029
72.965
34,342
47%
0.91%
2.48%
Kragujevac
Kragujevac, Aranđelovac,
Knić, Lapovo, Batočina,
Topola
302.385
96.923
32,104
33%
1.16%
4.26%
Užice
Užice, Kosjerić, Arilje,
Požega, Bajna Bašta,
Čajetina
207.445
67.873
29,893
44%
1.26%
2.89%
Why are we Different from Banks? (2)
•MFI’s target poor and entrepreneurial households mostly from rural areas
(70%) and a low average loan size – the target group is different.
Main Characteristics
Currency
Amount of loan
Terms
Grace period
Collateral
Purpose
Average loan disbursed
MFIs
Banks targeting micro
segments and SMEs
RSD only
EUR / RSD
30.000 – 400.000 RSD
500 – 15.000 EUR
3 - 24 Months
6 - 60 Months
Up to 3 Months
Up to 6 Months
Pledge; Guarantors; BoE
Pledge; Guarantors; BoE
Working capital, Fixed
Working capital, Fixed
assets; Basic needs
assets
1,000 EUR
4,000 EUR
Why are we Different from Banks? (3)
 Eligibility Criteria for Microloans
MFIs
 ‘Entrepreneurial spirit’
Live in rural areas
Low income
Banks engaged in MF and SME lending
Regular source of income with defined
minimum (salary or pension)
Registered business
Registered farmers
 Characteristics of rural areas – statistics
•
•
•
•
•
Almost 700,000 households in rural areas.
70% of rural population lack skills/education needed for labor market.
The unemployment rate in rural areas is more than 25%.
50% of employed population in rural areas have informal employment.
Populations in rural area mainly do not meet banking criteria for loans but
often they need these types of financial services.
Source of information:
Strategy of Rural Development 2010-2013
National Strategy for employment 2011-2020
Why are we Different from Banks? (4)
• Loan Officers (LO) are trained for better assessment of targeted
clients (low income, unemployed, entrepreneurial, rural,
irregular income), and “know the client better.”
• MFI methodology of work is adjusted to poor clients.
• Direct communication between MFI and clients on daily basis
(LOs every day are present in the field).
• Purpose of loans are adjusted to real clients needs.
• LOs support clients through all steps of procedures and provide
advices to clients on how to response to criteria.
Current Challenges of Operating
MFIs cannot lend directly, they are required to
operate through banks, using two models:
1. Deposit Model
2. Agency Model
Lending only in accordance with the Law on Banks
means that clients must pay much more (up to 3040% more) for micro-loans than if the MFI’s could
lend via an NBFI framework.
1. Deposit Model (Used by all MFIs)
Guarantee
deposit
AIS
Current
Account
at PBB
Guarantee
deposit
Guarantee
deposit



client
PBB
client
client
AIS borrows from US and EU social investors and deposits a 105.3%
deposit per each individual loan with PBB as a guarantee for each loan
(100% for loan, 5.3% for NBS mandatory reserve)
PBB disburses loans to clients recommended by AIS, with each loan
being guaranteed by a specific deposit provided by AIS
AI is paid interest on its deposits and thus it indirectly receives money
from its clients. Liquidity- and administration-intensive, FOREX risk.
2. Agency Model (used only by AIS)
client
Guarantee
deposit
AI
Bank
client
client



AIS deposits a guarantee deposit of the whole portfolio of loans
disbursed by the bank as collateral, increasing the deposit as client is
late with payment and repaying the whole loan at 120 days (effectively
guaranteeing all loans)
The bank disburses loans to clients proposed by AIS
The bank pays the agreed monthly agency fee to AIS for its microlending services (finding and assessing clients, monitoring and other
follow up).
Problems with these Models
Financial costs
Non-financial risks and
problems for clients
-Very costly for the MFI: the bank gets -AI’s advantage of being fast in
a very high percentage of the total
disbursements to needy clients is put
interest rate for no risk or requests
in question.
very high deposits.
-Bank can changed conditions on a
- Cost of funds an issue for the MFI.
whim, which in turn can affect
sustainability and conditions for
-The banks’ margin is passed onto the clients.
clients, which result in much higher
loan costs for them due to the need
of working with a partner bank.
-AI depends on the financial health of
the bank.
Conclusions
The primary issues and problems with this situation include:
• Problems on the asset side for the MFI: preventing growth due to
bank putting caps and changing conditions, high cost of the model
• Problems on the liability side for the MFI: local funding hard to
obtain due to lack of regulatory framework and collateral
requirement is prohibitive. Foreign lenders offer short-term
expensive deals and open currency exposure is created/remains.
• In the long term, both models are likely to lead to the disappearance
of the MFI as its equity is eaten up by expensive bank charges,
higher operating costs and FOREX risk.
• Since banks do not want to reserve 100% for this target group and
they do not know how to find these clients, the rural poor are
bound to remain “un-served.”
Solution: NBFI Law
• The MFI’s believe that the only path forward is a more flexible
NBFI Law which will allow MFIs to function openly without
these added costs and risks and to reach scale.
• The law could allow us to diversify lenders, to mitigate open
currency risk, to reduce costing and to help reach scale (for
sustainability) while reducing the pricing to clients.
• AIS and the other MFI’s will do what they can to support such
a framework, including cost-sharing and planning / training
events and outreach with donors.
Can NBFI’s Play a Role?
Goals of Non-Bank Lending Provision (microfinance) in Serbia:
1. Increase the amount of lending support to startups, SMEs
and rural areas by accessing high levels of EU donor and
social loan funds from outside Serbia for NBFIs.
2. No deposits taken, not risking financial stability.
3. Significant outside interest of important donors and
multilaterals in providing financial support.
4. Not a systemic risk to the financial sector, particularly if
access to the high-quality Credit Bureau is authorized.
How Should NBFI’s Be Regulated?
• In Serbia, MFIs should only be allowed when operated by
established players meeting sufficient requirements of :
– Transparency (externally-audited)
– Liquidity (funded by major players)
– Capital (sufficiently high capital ratios)
– Governance (high standards and experience).
• Where the safety of individual deposits is not at risk.
• Where loan sizes are limited (to below EUR 25,000) to meet
EU criteria and so not to provide unfair competition to banks.
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Microfinance Working Group of Serbia
To facilitate an appropriate form of non-bank
microfinance regulation, the Microfinance Working
Group has been formed which includes the following
stakeholders:
•
•
•
•
•
MFI’s (AgroInvest and Micro Development)
International Community
Serbian Government Representatives
Multilateral Financial Institutions such as EBRD
Other stakeholders
Next Steps
• Serbian government will decide if access to credit is a problem,
and if so, whether microfinance can be a solution.
• If so, create a law that facilitates FDI and microfinance funding
by international players if appropriate regulation is in place.
• A Coordination Group of donors, key ministries and NBS can
then be formed to finalize the regulations and bylaws and to
define the best steps in the provision of microfinance services.
• Then the international donor community can commit to
working with the Serbian government on appropriate steps.
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THANK YOU FOR YOUR ATTENTION!