The major challenge of microfinance

In contrast to traditional banks, microfinance institutions have a direct interest in the success of their clients’ businesses. This unique relationship benefits both sides

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KMF is leading the way for microfinance in Kazakhstan, which is relatively new there - having originated in the Indian subcontinent

Microfinance is a fairly young field in Kazakhstan. The first microcredit organisations appeared in the country after it became independent in the mid 90s. Up to the present time, microcredit companies differed from regular lenders in the absence of a system of regulation and a clear industry development plan. This can be seen in the huge number of registered microcredit organisations in Kazakhstan, which amounted to 1,535 as of July 2015, of which just 408 are active. In 2012, a new law was adopted to regulate the microfinance market, which required the re-registration of all microcredit organisations into microfinance institutions (MFIs), with further reporting requirements to the National Bank of Kazakhstan and relevant regulatory requirements. This measure will enable the market to clear out non-competitive players and enable microfinance companies to develop further.

Addressing a need
Microfinance originated in the Indian subcontinent. However, the market in Kazakhstan differs dramatically on social, geographic and demographic parameters. Thus, when KMF’s first office opened in the small town of Taldykorgan in 1997, it was crucial to properly tailor the microfinance experience gained from other countries to Kazakhstani realities. Specifically, Kazakhstan was an emerging economy, with all that this implies: an immature financial system, a low lending culture, and no alternatives to bank loans against unemployment growth.

If retail bank loans are based on a client having a stable job and repaying debt from his salary, microfinance directly depends on a client’s business success

With no stable work available, residents of the remote regions had to adapt and start businesses without proper qualifications or knowledge. Needless to say, access to traditional banking tools was closed to them. In this context, KMF set out to develop a viable product for the needs of this section of the population. The result was a range of peer-lending products, where the key factor was business availability, with no security required. Shared responsibility group guarantees were proposed as alternative to collateral. Such peer-lending products are now popular among MFIs all over the world, but 18 years ago they were revolutionary, and they enabled a lot of Kazakhstani people to go into business for the first time.

Over the first two years, KMF’s development resulted in the number of clients exceeding 2,000 and the company’s loan portfolio made over $435,000. In 2000, KMF opened a branch in the largest southern city of Kazakhstan, Shymkent, and in 2001 a branch was opened in Almaty. The company has maintained this, opening an average of one branch per year and maintaining a stable loan portfolio (now over $120m) and client growth to around 145,000 clients. At present KMF, has 98 offices, 70 of which are located in rural areas.

Company development, including geographic expansion, challenges businesses to integrate processes, which, in its turn, produces the need to develop infrastructure solutions in the IT sphere. In particular, the need to manage the entire loan cycle while developing comprehensive client database analytics. To this end, in 2012, KMF developed and implemented the ASBUKA 2.5 information system, which is being constantly improved in order to meet company needs.

Besides decisions to optimise internal processes, IT solutions are aimed at enhancing customer service. For example, in response to clients’ complaints regarding the time-consuming process of filing loan applications, KMF developed special software for loan officers, called Mobile Expert. By using this, loan officers can work both on computers and remotely on tablets, speeding up the application and preliminary decision stage by going directly to the client’s place of business.

Client focus
If retail bank loans are based on a client having a stable job and repaying debt from his salary, microfinance directly depends on a client’s business success. Long-term microloan repayment capacity is directly proportional to the yield of the microbusinesses on the strength of which the funds were obtained. Thus, MFIs are directly interested in the successful development of their clients’ businesses, and should do everything possible to assist them.

Though the logic is simple, not many MFIs actually manage to follow it. It’s not uncommon for MFIs to fail to act according to generally accepted client protection principles (CPP), to say nothing of providing additional services. To avoid falling into the same trap, KMF abides by a strict CPP policy, and was the first MFI in Kazakhstan to have passed the Smart Campaign’s Client Protection Certification procedure. Compliance with these principles is not an absolute guarantee for stability, but it does demonstrate a company’s understanding of its social responsibility, leading to greater client and investor confidence.

Evaluation based only on loan portfolio indicators and client databases may not be comprehensive enough, since it does not reflect development trends and the state of client businesses. In other words, to get a full picture it is necessary to track social indicators and whether non-financial services are offered to encourage growth. KMF is careful to keep track of social indicators, and as a result over 70 percent of KMF’s loans are issued on the strength of business goals, 68 percent of clients live in rural areas, and female clients account for 65 percent of the client base.

Education station
While evaluating our clients’ businesses, we came to the conclusion that, frequently, their prosperity is impeded by elementary mistakes which could be easily avoided, if they were educated on some financial fundamentals. To solve this problem, KMF and parent company KMF-Demeu have developed a social project to improve financial literacy, covering key issues such as family budgets and business skills. Special animation clips and educational brochures were developed to increase perception, convenience and accessibility. Overall, more than 60,000 people have been trained so far. Now, the second stage of the programme is in progress, and will hopefully yield even more significant results.

Such initiatives are important, not only because of their educational component, but also because they provide an opportunity for the company to collect feedback on various aspects of its activity and clients’ needs.

Thus, the key factor for an MFI’s success is client welfare, which in its turn depends on business prosperity. So, in the near future, MFIs will pay more attention not only to interaction with clients, but also to how they can have a positive impact by providing additional services, such as consultancy and education. In other words, the more an MFI does for its clients, the better it’s going to develop. KMF commits to this philosophy in pursuing its mission to offer quality microfinance services and to encourage the welfare and growth of micro, small and agricultural businesses.