The FINANCIAL — Crystal, one of the leading microfinance organizations in Georgia, has boosted its credit portfolio by 62% in 2014 in comparison with the prior-year period. The company plans to expand its market share and reach 9%. Well-organized risk management is what has helped Crystal to maintain an overdue loan portfolio of less than 2%. Enhancing the financial literacy of the population is considered highly important by the management of Crystal. The company has already established the campaign “Borrow Wisely” in Georgia.
“The political changes that took place in Georgia in 2012 have brought businesses more freedom, property protection and less pressure. The partial opening of the Russian market has turned out to be quite stimulating. The reduction of political risks has encouraged a sense of stability and predictability. However, I would not say that everything is perfect in this regard. Room for improvement still remains,” Malkhaz Dzadzua, CEO at microfinance organization Crystal, told The FINANCIAL.
Dzadzua said that the recent Ukrainian conflict has not changed their foreign partners’ attitude towards the region. “Our funding has actually doubled since the 2012 elections. Crystal is mainly receiving financial resources from international investors. Such an increase of funding means that the attitude of investors is quite positive. As for the impact of the Russian-Ukrainian crisis, it has not yet been reflected in our investors’ approach.”
“However, further escalation of the situation may contribute to several restrictions and the reduction of funding. A part of our agro credit consumers are trading with Ukraine. Accordingly, their business could be jeopardized. Hopefully, the parties and the international community will soon be able to find a reasonable solution,” he added.
Dzadzua estimated the current year for Crystal to be quite productive. The company had a successful growth period. The company’s total assets have increased by 64% as of 1 October, 2014, in comparison with the prior-year period. They amounted to GEL 73 million. The volume of loans issued reached GEL 62 million. The sum is 62% more than it was in the same period of the previous year. The number of active borrowers increased by 108% and reached 34,000.
Q. There were 67 microfinance organizations in Georgia as of the end of 2013. Â Do you not think that there is an abundance of MFIs on the market?
A. A total of 67 MFOs on such a limited market as Georgia is probably more than enough. However, it should be noted that the majority of them are quite small in size. The bulk share of the real market is controlled by just 5-6 MFOs. I think that the extension and consolidation of small MFOs will soon start. As a result, the market will determine the optimal number.
The market share of Crystal is 7% for now.
Based on the successful results of previous years, we plan to expand and increase our market share to 9% for 2015.
Q. Despite the large number of MFIs, traditional banking products are still dominating on the Georgian market. What are the competitive advantages of MFIs by which they can manage to compete with commercial banks?
A. Besides MFOs there are several banks actively presented on the microfinance market. However, due to the specifics of the market we remain the market leaders. The simplicity of loan issuing, minimal documentation and bureaucracy, unsecured and non-collateral loans, broad geographic reach and easy access to the regions, opportunity to take higher but manageable risks, many years of experience and specialization in micro-businesses are the key advantages of the MFO. In addition, we already manage to offer competitive prices on a number of products.
Q. A solid number of MFIs’ consumers are those who have been refused lending by commercial banks. How big is the risk factor for MFIs in this case?
A. I would not say that the consumers of Crystal are those who have been declined by banks. In terms of Crystal such customers make up just 10-12% of our total borrowers. The majority of our clients are applying to us due to the above-mentioned advantageous factors we provide. In general, consumers that have been declined by banks are not automatically bad payers. The main difference is in the specific approach towards lending criteria and risk-appetite of financial institutions. We carefully analyze a client’s income and expenditure dynamics, business skills, experience, solvency, social status, and then take a final decision. One of the main purposes of the microfinance institution is serving a low-income and financially excluded segment. The leading MFIs have very well-organized risk management systems. Accordingly, the quality of our portfolio is much better than that of banks.
Q. How is the risk management of Crystal run?
A. We use the best and most efficient risk management standards that currently exist on the international microfinance market (mainly based on CGAP methodology). Therefore the volume of our overdue loans makes up less than 1%. It is one of the best indicators in the sector.
Q. Overdue loans remain one of the biggest challenges of financial institutions. What is your vision for solving this problem and what is the role of the Government in this?
A. Overdue loans are a complex problem. They require extremely careful, calculated and long-term approaches from all sides, including state institutions. Overdue loans are divided into two categories: wilful and unwillful defaulters. Separating these two categories of defaulters and providing them with a different strategy is a significant factor. No one is secured from natural business risks. They arise beyond our control. Therefore the financial institutions should be totally responsible for such risks and take into account the relevant costs and reserves of the product’s financial structure.
The major problems are constituted by a second category of clients (wilful defaulters). They manage to borrow more than they need and misuse it. This step is often backed by various manipulations and also by the poor risk management of the banks. Such risks increase in direct proportion to the enlargement of the sector and the easy availability of credits. Â Prevention is the key factor in this case. Â The solvency and financial viability of a borrower should be carefully studied. Loans that are issued very quickly, en masse and without proper financial analysis, accumulate into such a category.
With minimal and effective regulations the Government really can reduce these risks. Establishing prudent lending standards for MFIs is the key issue. The standards should be related to the maximum transparency of loan pricing, conditions and all basic parameters. Delivering full information for consumers is crucial. Supporting financial education projects is a second important step. It is essential to provide consumers with proper knowledge and help them to make the right choice. Finally, supporting start-up businesses and micro-insurance systems, which will be tailored to the needs of the low income population, will also be helpful.
Q. What is the share of overdue loans at Crystal?
A. Traditionally MFI Crystal has been keeping up one of the best results in term of overdue loans in the sector. Currently they measure just 0.7% of our credit portfolio. The total problematic portfolio including overdue, restructured and write-off is less than 2%.
This figure has not changed in the past two years.
Q. MFIs are focused on financing SME businesses. How has the activity of this sector increased since significant political changes took place in Georgia in 2012?
A. Crystal is mainly financing micro and small businesses, including family-type small farmers. Over the past year our credit portfolio has grown by 62%. Respectively, we can conclude that political changes have brought about positive changes for this sector. A large part of our growth comes from agricultural loans. State agricultural programmes are also contributing to it.
Q. The president of the central bank has in the past referred to the impact of the unregulated banking sector and its threat to the financial sector. How important are state regulations in this regard?
A. I am generally in favour of minimum government interference in the business sector. However, total ignorance or lying in the “invisible hand” of the market is not the right approach. The dangers outweigh the benefits in this case. The central bank can impose some important and clear regulations. Transparency and protection of consumers’ rights should be obligatory for financial institutions. From 2010 Crystal has been reflecting the effective interest rate in an agreement. However, the majority of MFIs are not doing it. Therefore, consumers are mostly unaware of the real cost of credit. The quality of consumers’ protection and competitiveness of the sector will improve by settling this particular demand and introducing a few simple regulations.
Q. We frequently hear statements regarding the importance of increasing the financial literacy level of citizens. Can this solve the growing problem in the financial sector and how do you envision the training of the population?
A. Enhancing the literacy level of the population is one of the most effective ways of reducing the problem. It is a good solution for establishing an effective, civilized and competing financial market. Such a problem exists even in developed countries. So, the Government and responsible companies are frequently encouraging educational projects. This does not mean a deep and academic financial literacy. The usage of credits in simple and clear language should be included in the messages delivered to the population. It should include advice and simple instructions, like when we read a warning message on cigarette packaging regarding their harmfulness. Educational projects will not solve the whole problem, as a proportion of people quite often do not listen or follow proper advice anyway. It is the same with smokers: Despite the warnings the majority continue smoking even when they know that it is harmful. However, this is an important minimum step and “must do” that a government should take for citizens together with the financial sector.
I am proud to state that Crystal is actively involved in the international consumer protection campaign “Borrow Wisely”. There are 12 countries participating in the campaign. It was initiated by the Polish Microfinance Center. In this campaign the population is provided with specially prepared information brochures and a simple guide. Consumers are advised on how to borrow wisely, on what to pay attention to while cooperating with banks, what questions to ask themselves before making decisions, how to calculate the optimal amount of the loan, which information to request, what their rights are and so on. I am hopeful that with this campaign we will contribute to the improvement of the financial literacy of our population.
Q. Could you please tell us a bit about yourself, your education, work experience and why you prefer to work at an MFI rather than at a commercial bank?
A. I was honoured to be one of the founders of the company, and together with my colleagues to take an active part in its creation and development. My work experience started in 1995 as a volunteer and business consultant. In 1998, I continued with my career but as a credit officer. Then I was a branch manager, programme coordinator. And finally, in 2004, when Crystal was established as an independent micro finance organization, I became the company’s General Director and Chief Executive Officer.
During my career there have been some quite attractive offers from banks and other companies, including those from abroad. However, at that point the maximum freedom and flexibility for fulfilling ideas together with my colleagues and partners was more important to me than personal financial and career motivation. I think that we accomplished it all quite successfully. The small project originally started with USD 10,000 start-up capital and then turned into the USD 35 million leading MFI in Georgia. Crystal has 25 branches with 400 employees. Despite this history I do not think it should continue endlessly in this way. I do not rule out the possibility of switching to another business in the future.
I was born and went to school in the Gali region of Abkhazia. Now I live with my family in Kutaisi since the war. It was there that I graduated from the State Institute of Subtropical Agriculture, in the Faculty of Economics and Management. Throughout my career, I have had the opportunity to take part in a few dozen high-class trainings and educational courses in Georgia and abroad. Finally, in 2013-2014 I successfully completed the certification courses at the Frankfurt School of Finance and Management. I was awarded the status of international certified expert in micro finances and risk management. I believe that enhancing literacy is always possible and necessary for a modern businessperson. Therefore, I plan to continue to enhance and improve existing knowledge in the future.
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