November 7, 2011

AMK Cambodia's Managed Commitment to the poor

[MICROFINANCE FOCUS]

Microfinance Focus, November 4, 2011: Cambodia’s top MFI in terms of client outreach, AMK (Angkor Mikroheranhvatho Kampuchea Co., Ltd), has just won the Fondazione Giordano dell’Amore International Best Practices Award.

AMK is rated ‘AA’ for social performance by Microfinanzas, scored #16 globally in MIXs latest ranking of the 100 top performing MFI’s, won MIX’s Gold Award for social performance reporting, and was highlighted in the Imp-Act Consortium’s Managing Social Performance series.

In an exclusive interview with Microfinance Focus, CEO Pete Power talks about social performance leadership, Microinsurance, Cambodia’s new credit bureau, village savings, the rural-to-urban learning curve, and responds to the Over-indebtedness Early Warning Report.

Microfinance Focus: Congratulations on winning the Giordano dell’Amore International Best Practices Award. What is it about the leadership in your organization that makes AMK one of the first names to come up in discussions of best practice and social performance?

Pete Power: We have a very clearly articulated mission and there is absolute commitment to that mission at multiple levels: shareholders, Board of Directors, management and staff. The commitment isn’t just verbal, it’s a commitment that’s managed. It’s deliberately ingrained in our management structure and our decision-making processes. We have a Social Performance Management Framework for which we received this award.

Microfinance Focus: What are the mechanisms and measurements you have in place to assure that you’re staying on mission?

Pete Power: Our mission is “to help large numbers of poor people improve their livelihood options through the provision of appropriate and viable microfinance services.” So in order to ensure commitment to the poor, we do an annual client survey to ascertain whether our clients are representatively poorer than our non-client. To date in the history of AMK this has always been the case, so that proves to a certain extent that we’re developing products that target the poorest segments of society.

The ‘large numbers of poor people’ component is relatively easy to measure. We are now the largest MFI in Cambodia, with 280,000 customers, and we continue to grow our customer base.

‘Appropriate and viable microfinance services’ is another component of our mission. This refers to microfinance services, not just microcredit. Many people think that microfinance services refer to credit only, but credit is only one component of a whole system of financial services that should be available to everybody. Other services in addition to credit are savings, which we launched in 2010, money transfer, which we launched in July 2011 and microinsurance, which we hope to launch next year.

The component of our mission that’s most difficult to measure is ‘helping people improve their livelihood options.’ We conduct detailed change surveys on a 3-year basis, revisiting the same clients we visited 3 years before, and we do very detailed cash flow and asset surveys to come up with what we call a Wellbeing Score. We try to ascertain if that score has changed, hopefully for the better.

Microfinance Focus: What have you found out?

Pete Power: The results have been good, but since AMK has existed since 2003, we are still a young company and it is to a certain extent too early to draw definitive conclusions. The upcoming 2012 change survey will tell us a lot about the impact of our business sine its inception. The results will likely have a big impact on our strategy going forward.

I mentioned the components of our mission because they are the key elements of our social performance management framework, which impacts how we run our business. All research reports inform management and are presented to our board-level Social Performance Committee.

Microfinance Focus: Is AMK’s Board of Directors comprised mainly of financial professionals or development professionals?

Pete Power: It’s a diverse mix of people, with development sector, investment banking, microfinance and legal backgrounds. The Chairman of the Board is Tanmay Chetan who, interestingly enough, was the original CEO of AMK and who effectively created AMK’s mission, vision, operating structure and strategy. This structure has been built upon over the years, but the commitment to mission has been constant since the founding of AMK.

Microfinance Focus: There has been disastrous flooding in Cambodia recently making even more apparent the need for health and crop insurance services in the country. What is AMK’s stance on the role of MFI’s in non-savings and non-credit services?

Pete Power: Microinsurance is a financial service and we view it as part of our mission to provide it. Microinsurance legislation is currently being drafted by the Cambodian government, and once the legislation is in place, we hope to begin providing it.

We see insurance as an important financial service, because when you look at an emergency like the current flooding, our clients can react in several ways financially. They can get an emergency loan, which we currently provide. This gets our clients short-term cash but raises their debt burden. Alternatively clients can dip into their savings, and AMK does help people save for such eventualities. But the ultimate coverage for something like flooding is insurance.

With regard to non-financial services such as financial education, financial, literacy, etc., AMK does not provide such services.

Microfinance Focus: Why not?

Pete Power: We don’t believe our clients typically need these types of services. If you go to a typical Cambodian village in Cambodia that has access to two or more MFIs and you ask the villagers who has the best interest rates, the highest fees, the least/most coercive collections practices, or who has the best customer service, they will give you a very clear answer. To me this is a clear indication of financial literacy and indeed financial intelligence. To me active, fair and transparent competition is a very effective provider of financial education.

Microfinance Focus: But do you agree that it’s important to provide financial literacy with regards to the particular product that clients are using?

Pete Power: Rather than financial literacy, I would call that clear and transparent communication of product features, terms and conditions. It all boils down to fair pricing and transparency.

Microfinance Focus: It has been reported that Cambodia has a high risk of over-indebtedness. Is over-indebtedness an issue in Cambodia, and how does AMK address multiple borrowing?

Pete Power: If you are referring to the Over-indebtedness Early Warning Report which was commissioned by Responsibility and conducted in cooperation with the University of Zurich, my opinion is that it is very high level and not scientific, and I would maintain in the case of Cambodia, it is not accurate. It is also based upon data from 2009. Much has changed in Cambodia since then, with PAR rates decreasing substantially and much work being done to get the credit bureau up and running.

Effectively, we are talking about a very rough, high-level report that got a lot of publicity and a lot of play with lenders, but the reality on the ground is quite different.

Microfinance Focus: What data do you use to determine market saturation?

Pete Power: AMK is currently cooperating with three of our main competitors, Amret, TPC, and Vision Fund. This group services over 70% of the clients in the entire sector. We are pooling information on number of clients by village for the largest provinces in Cambodia, and we are comparing the total consolidated clients from the four of us with census data on the number of households in each village. By cooperating with other MFIs, we are trying to get to grips with the reality in Cambodia—data-driven reality—unlike the report from Switzerland.

Our initial results confirm that, while there some clustered instances of over-saturation and probable instances of over-indebtedness, there are many more instances of no client outreach whatsoever, and we found that the vast majority of villages have reasonable amounts of market penetration.

We have an internal policy within AMK of no cross-financing. So if we can determine that a customer has a loan with someone else, we will not give them a loan. As you know, that is very difficult to enforce and people could take another loan after taking their AMK loan.

Our estimate is that probably 20% of our clients have other loans (i.e. multiple loans), but we try to limit our exposure as much as possible. We hope the new credit bureau will help us get much better information on multiple loans and over-indebtedness.

Microfinance Focus: So the credit bureau in Cambodia is a reality?

Pete Power: The credit bureau will be fully operational early in 2012. It will take some time before the bureau data is clean. But probably less than a year from now we will have absolute transparency as to how many loans clients have with other institutions, and that should solve the over-indebtedness problem pretty conclusively. So we think the credit bureau is a good thing.

Microfinance Focus: AMK recently launched a loan product for the urban poor. What are the challenges in offering non-collateralized loans in an urban setting?

Pete Power: AMK’s roots are in rural lending. In fact we only opened our Phnom Penh branch in 2009. Prior to that we had zero business here in the capital. When we first began business in Phnom Penh, we struggled to get client traction because we were trying to transplant our traditional rural group-based, group-guaranteed lending model, and it didn’t work. Most people in urban poor communities in Cambodia work all day and don’t have time to attend group meetings. They are recent emigrants and don’t know many people, certainly not well enough to be willing to form a group and guarantee their loans. They might know one or two of those people but it is unlikely they know four to six people well.

And also it is harder for us to find them, even though the population density is higher. People are out working; they come and go. It’s actually a much more unpredictable lifestyle. So group-based lending wasn’t working, and when we tried the traditional collateralized individual loan methodology, this didn’t work either.

Microfinance Focus: Why not?

Pete Power: Because these people are poor, they are migrants from the countryside, they pay rent or live on public land, and they don’t have many possessions, so requiring collateral would not work. We were faced with a conundrum because the only way to meet clients’ needs was with individual modality but the individual clients typically couldn’t provide collateral.

We finally came up with an individual non-collateralized loan product. It does require a guarantor, but only one guarantor, so borrowers only have to find one other trustworthy person. The urban poor loan product works well, because it is quite innovative. The only other player active in the urban poor market is an organization called Chamroeun. I believe we are the only two MFIs that have recognized this as a large underserved market. As a result there is untapped demand.

We launched our urban poor product in Phnom Penh in September 2010 and we now have over two thousand clients with 0% overdue loans. After a year-long pilot, in October 2011, we launched the product in Siem Reap and will roll out to other urban centers in the coming year.

Microfinance Focus: How does AMK maintains its proximity to its clients, and why is it important?

Pete Power: Let’s start with physical proximity. Many of our clients have no transportation options, and even if they do, they live far from the paved roads, and it may take a long time to get to the closest market town, especially in the rainy season. So we have what we call “Finance at Your Doorstep.” This is our operating methodology, where we send our client officers to the village to actually meet with clients, disburse loans, do collections, etc. This operating methodology keeps us very close to our customers, and the growth in our client numbers proves this.

Another component of physical proximity is the sub-branches that we set up once we have around 3,000 clients to a branch that’s located 50 kilometers or more from the next nearest branch. We’re building out our branch network so it reaches as many clients as possible. Our clients need this accessibility and it lowers our operating costs.

Yet another component of physical proximity, to be launched in November 2011, is mobile banking. The idea is to have one AMK agent in each village who will process transactions via mobile phone connection to our core banking system. The agents we select, ideally local shopkeepers or merchants, will have a full-time presence in the village and be trusted by the community. AMK will manage the agents’ liquidity and ensure that all customer checks and necessary KYC procedures are followed. If this works out, AMK will eventually have an agent in every village in Cambodia.

AMK wants to serve all of the customers who are off the paved roads in Cambodia. We are the leader in this segment and want to cover it in every regard.

Microfinance Focus: Does that include savings?

Pete Power: We already offer savings at the branches. And if our mobile banking strategy works, we will be able to mobilize savings at the village level for the first time ever. Nobody in Cambodia has yet been able to successfully mobilize formal savings outside of the capital and market towns.

Another way we stay close to our customers is by understanding them well and designing our products specifically for their needs. These functions are led by our research and product development departments. Our research department conducts detailed surveys on our client livelihoods, asset levels, customer satisfaction, etc. on an annual, biennial, and triennial basis. Much of this information is used by our product development department to create the products that our clients need.

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