When one wants to get a big loan, to buy a car for example, no one will think that a bank is doing something bad and unethical by giving him a loan. But if someone needs to buy a microwave, people might think that this microcredit was given to him with a very bad intention. Why does this happen? Why do all these myths about the microfinance business still exist – we asked Anton Dzyatkovsky, co-owner of MicroMoney, a company which specializes in microfinance in Asia, to help us understand why there are so many myths and superstitions about small loans. This is what he told us.
All these creepy stories are more common in Eastern Europe. In Asia for example, the situation is different. We know this because we work there, - pointed out Mr. Dzyatkovsky.
'In East Europe credit market is oversaturated, there are too many players. But quite a big share of the market is occupied by illegal or even criminal companies which offer to "fix" someone's credit histories, knowing well that it is practically impossible. Also because of the mentality of the people the percentage of non-returned credits is quite high in this region. So collector's firms threat and persecute people.
Recently we ( Micro Money company) have published an ordinary business article in Russian media about history of our company in Cambodia. And surprisingly we received more than 150 comments with epithets of "ghouls", "insignificance" and "crooks". Due to all comments I made a myth list for you'. So, let's find the truth about microcredits together.
The haters online immediately calculated that this would be about 730% per annum. In fact, no one in the Asian market takes out microcredit for a year. And if payment is delayed for more than 30 days, we try to negotiate with the client about a reasonable way to repay the loan. We offer installments, or, we can agree on a 'promise to pay' after the person gets their first salary on a new job, and so on. After this, the chances of not-repaying the debt fall sharply and the "counter" stops.
Nobody wants a man to get into the trap of a non-return 700%, it is unprofitable for business. The company is interested in breaking the sum into parts, helping the client pay the debt because it means that he will come for one more loan later or recommend us to others. Surely he would not return if he was scared of huge unpayable percentages. That's why even if our client gets into big trouble or something tragic happens to him, we make a deal and agree that only the amount of the loan with no additional percentage will be repaid, we count the loss as operating expenses. 80% of creditors agree to this.
And, just by the way, one more time I will remind you that we are talking about microcredits. The very first loan we issue is no more than $60. After the 5th or 10th loan (repaid in time), the amount of loans grows to $150. We issue not more than 40% of the salary, while significantly lowering the rate. In our region, amounts of money do not even reach up to three zeros.
No, we do not. It's dishonest and causes reputational damage. It is very important for us to grow. We want our clients to come back to us. If he or she is blackmailed and threatened this will not happen.
In our call center, an employee is immediately dismissed for any disrespect to the client.
The usual scheme is: before the thirtieth day of the loan, we send an SMS with reminders. During the first month of delay, we call and call the debtor to sanity. Usually it works. After that, we forget about the debt, because it is economically impractical. Only 12% of people pay debts after this date, and usually we simply agree that only amount of the loan without interest will be paid back.
There is an opinion that we are very happy when there are delays in payment because we earn more. But in Asia, the percentage of non-return short-term loans is up to 7%! For example, in Cambodian MFIs, the share of collateral loans (there are no others there) overdue for more than thirty days is over 0.9%. People are used to paying back debts. Therefore, we earn in a different way - it is profitable for us if client returns. Each of our customers took 7 or more loans, conversion of the second and subsequent loans - 73%. And 7% of borrowers take more than ten loans.
Some might think that we want people to take loans all the time they need to solve any kind of a problem. Even then they could not pay interest on the loan - we make them take a new one.
After all, everyone had a situation when you are standing on the street and you need to pay for something, but you do not have any money with you. If you have a magic button on your phone "borrow a credit in ten minutes," you would probably use it. But, after all, no more than four times a year. Credit is an economic panacea, but this medicine can’t be used often, and we do not want it to be used often. It will ruin our audience, and it is our the most valuable asset. Most part of our audience - people aged 25 to 34 years, if we keep their loyalty, we earn much more.
In Asia, level of literacy is very low, including financial. That's why we educate people. You can check our Facebook pages we persuade people not to take loans for parties, alcohol and other entertainment, but only for services, education, for business. We always specify the purpose of the loan. Applying through the application - you will be asked by the program, calling the call center - the employee will certainly specify how are you going to spend money. If we find out that the goal is inadequate (go to the club, buy a new iPhone because it's cool) - the customer will not receive a loan.
Those who take money for such purposes, often do not return credit.
This myth exists because of the big amount of the illegal companies, they offer a loan for lower rates than we do. But we are in legal business, everything is regulated by the state.
Processing of each loan costs us $10, including operating expenses - office rent, salary, equipment. With average loan of $60, this is pretty decent spending. If client delays payment, our expenses increase. For comparison - with a "long" delay, the collection of one debt costs us $100. A person, for a minute, took only $30 loan.
I can say that the employee of the collector's call center receives two or three times more than the usual operator. Because he is more than just an operator – he is a financial consultant, a psychologist, and a sales manager at the same time.
We do not issue large loans, but the costs for marketing, credit rating, call center, debt recovery and losses are practically the same as for large credit organizations. Big banks refuse to serve microcredits not because of the moral reasons, but because they do not want to work in conditions of low margin.
The target audience for microcredit is people who do not have enough money right now, and they are ready to pay for convenience to solve the problem. Fifteen customers out of twenty have a permanent job and an average income of $300, which is ok for Southeast Asia. Cambodia is not a starving country, unemployment there is less than 7%.
My father is a lawyer, he often told me that the lack of money often pushes people to commit crimes. When you give money to a person, he solves his problems and does not go to any stupid deeds, which he can then regret all his life. I really believe that by giving people microloans, we smooth out social tensions.
Here are real typical stories of our customers.
- I lost my wallet on my way home, I will repay credit after salary.
- I traveled, I realized that I did not have enough money for a return ticket.
- We needed money to celebrate grandfather's anniversary.
- I wanted to pay school's fee, but I do not have any friends in this city to borrow some money.
- Spent more money than I expected, I do not want my husband to know.
In Cambodia, people often take out a loan for gifts and smart clothes, then they are invited to a wedding, for example.
And there are hundreds of such stories. Of course, there are also sad reasons for borrowing, - diseases, funerals and so on, but less than 15%. We have a microcredit business, our clients take out a loan to buy a sofa, not an apartment.
Does the negative attitude to microfinance business influence our work? To be honest, no. We work in Cambodia, Myanmar, and we have enough advantage over other microcredit organizations. Only we issue loans without collateral and paper documents, so even people who don’t have credit rate apply to us. The entire scoring process is conducted through access to the mobile phone of the borrower and, as a result, consideration of the application takes only a few minutes. Now we plan ICO (Initial Coin Offering). And we are sure in our business.
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