The FINANCIAL — MFO Crystal has successfully completed the process of attracting international investments. As a result, Crystal plans to continue market growth, enhance its competitive advantages and offer innovative products to its customers. The recent appreciation of the Georgian Lari has positively impacted on the conditions of Crystal’s clients and their solvency. The overdue loan portfolio has decreased from 1.7% to 1.3%, y-o-y.
MFO Crystal ended the first quarter of 2016 with expected growth. Despite external difficulties, the credit portfolio of Crystal has increased from GEL 83 million to GEL 115 million y-o-y. With 30%, agro credit is dominating out of its loan products. It is followed by the service sector – 24%; trade – 18%; and other directions. The recent appreciation of the Georgian Lari had a positive impact on the repayment capacity of Crystal’s borrowers. As a result, the volume of overdue loans during the quarter decreased from 1.7% to 1.3%.
“Any challenge is a good lesson if we manage to draw the correct conclusions and do not shy away from changes and self-criticism, where necessary,” Malkhaz Dzadzua, CEO and Director General of MFO Crystal, said in response to The FINANCIAL’s question – What are the main lessons to be learned from the recent devaluation and economic downturn? “In similar cases the Government should communicate with residents more effectively and actively and start preparations for preventive measures earlier, before the crisis. Businesses should also be more cautious and create certain buffer reserves and risk mitigation instruments during non-crisis times, for dealing with future challenges. The population wishes to get a better understanding of the basic principles of economics and business in order to be more protected during market fluctuations and to overcome crises with fewer losses,” said Dzadzua.
In his interview with The FINANCIAL, Dzadzua observed the contribution of micro finance organizations to the Georgian economy. He highlighted the main challenges of financial institutions in Georgia.
Q. The net credit portfolio of micro finance organizations in Georgia exceeded GEL 1 billion in 2015, up from GEL 842 as of 2014. What contributed to this growth?
A. The Georgian micro finance sector ended 2015 with significant growth. Total assets increased by 46%, while issued loans were worth GEL 1.2 billion, 41% more than in the previous year. There are 70 MFOs operating in Georgia for now. With more than 400 branches, the number of employees is over 5,000. Flexibility and easy access to borrowing are the main contributors to growth. Contrary to banks, small-sized MFOs better manage to adapt to the market changes more easily and quickly and serve those segments which are treated by banks more conservatively in terms of risks. However, it should be noted that due to the deteriorated environmental conditions, the volume of problem loans also increased last year. The reserves of possible loss increased from 10.8 to 26.5 Million GEL, or 146% growth. The statistics once again prove that the microfinance sector is a high-yield industry, but high-risk at the same time.
Q. We remember the statement of the Secretary General of the UN, Kofi Annan, when he declared that microfinance could be a “weapon against poverty and hunger”. What is the role of MFOs in the Georgian economy and how effective are they against poverty?
A. As we know, the UN announced 2005 as the international year of micro finance. The following year, Muhammad Yunus, the founder of the first micro finance bank, was awarded the Nobel Peace Prize for the “effort to create economic and social development from below”. In many countries, micro finance has been and still is considered to be one of the most effective tools against poverty, unemployment and basic social issues. However, during the last 10-15 years the sector has rapidly transformed and commercialized. As a result, micro finance companies have more integrated into the financial market, rather than remaining as an instrument against poverty. The financial capabilities and importance of MFOs have significantly increased in accordance. The products offered by MFOs have been diversified and the service quality boosted. However, the social side and fundamental values of microfinance have been relatively overshadowed. Nevertheless, together with the commercial side, the world’s leading responsible MFOs try not to lose the social mandate and to continue public support by reducing poverty.
Fortunately, we do have responsible MFOs in Georgia as well. They have comprehended the importance of social responsibility and try to implement the best international practice in their work. We are glad that Crystal is one of the companies that have won several international and local awards for its social responsibility, transparency and protecting customers’ rights.
Q. Agriculture constitutes quite a solid part of Crystal’s credit portfolio. What is your viewpoint regarding the development of this field in Georgia and what are the main obstacles that exist for now?
A. More than half of our loans are distributed in rural areas. Over GEL 34 million, or 30%, is made up by the agriculture sector. Disuse of modern technologies; low efficiency; small (non cost-efficient) farms; lack of cooperation; a deficit of storage-fridge infrastructure; lack of quality control and similar factors – are the main challenges for a modern agriculture sector of Georgia. In order to increase competitiveness, these issues should be resolved and financial and non-financial resources should be used wisely and effectively.
Q. Small business is the target group of Crystal. How would you estimate the literacy level and skills of the rural population while doing business and what are their main mistakes?
A. I’m sure that micro entrepreneurs involved in SME do not have less skills or opportunities for doing business than the representatives of large businesses. We know from history that almost every large-scale company in the world started its development from quite a modest scale and micro level.
Poor planning; lack of management capacity; focus on short-term strategy; exaggerated estimation of their own abilities; awkwardness on the market and lack of innovations – can be considered as their main mistakes.
Q. One of the distinguishing features of MFOs on the international market is that their main segment is women. In the case of Crystal, 52% of your clients are female. What contributes to this feature of MFOs?
A. Typically, MFOs are working with those segments which are less covered by traditional banking products. In many countries the credit portfolios of MFOs and non-banking institutions in rural areas are much larger than of banks. The trend is similar in regard to physical persons and women. Due to the light regulations, contrary to banks, MFOs are easily issuing unsecured small loans for individuals and undertake market risks therefore. The segment of such small-sized and household loans is mostly comprised of women.
Q. An outstanding advantage of MFOs is that they offer financial assistance to start-ups. What is the share of start-up loans in your portfolio and how have they been changing during the past three years?
A. Financing start-ups remains one of the main challenges of the sector. Due to the high risk, many financial institutions avoid issuing these types of loans. At the same time, start-ups themselves are less active in using credits at the initial stage. They prefer to start their business with their own modest capital. Only after some business experience and positive records they apply to financial institutions for additional monetary resources. This is probably a reasonable strategy, as attracting long-term cheap commercial resources is quite difficult for start-ups. Meanwhile, under the existing market conditions, short-term liabilities can be kind of a hindrance for them. The credit portfolio of Crystal for micro start-ups is worth about GEL 700,000. Over the years, this amount has been increasing a bit slower compared with other categories.
Q. What are your criteria when evaluating start-up businesses?
A. When evaluating start-ups the main focus is on the personal features of the author of the idea. His/her reputation, market knowledge, critical thinking and planning abilities are also crucial. It is important to determine when the business will reach its breakeven point in order to ensure financial stability. Crystal has funded hundreds of successful start-ups. Some of them have already gone beyond micro-scale enterprise and started export their products abroad, including to Europe.
Q. We are witnessing a growth of financial companies, not regulated by the Central Bank, which offer quite attractive interest rates on so-called deposits. We remember the recent warning of NBG about this. What is your opinion in this regard and do you see a need for their regulation?
A. Wise and reasonable regulations will secure consumers’ fundamental rights as well as promote free and fair competition of the business. It would significantly improve the market reliability and increase confidence in the sector. I appreciate the decision of the Central Bank not to interfere in the activities of companies’ directly but to give out suggestions and recommendations to the population. It would be desirable to add certain regulations to price transparency, consumer protection, responsible financing and advertising rules.
Q. The devaluation of the GEL, which had a huge impact on the Georgian economy, recently turned around and the currency started appreciating. However, there are no concrete economic reasons for this strengthening. Do you see any risks behind the artificial appreciation (if it really is artificial)?
A. After the 40% devaluation of the Georgian Lari, the recent appreciation has positively impacted on the conditions of our main clients and their solvency. As they say, during the devaluation there were some psychological moments and times of speculation. If it were not this way, the exchange rate would not have fallen so dramatically. It seems that recently this psychological moment has passed and the national currency is gradually returning to its natural market condition. An absence of sharp fluctuations, either appreciative or depreciative, is of key importance to businesses. In times like those, predicting short and long-term prices on the market becomes almost impossible. As for investors, they shift to waiting mode.
Q. What are your expectations for the Georgian economy in 2016?
A. Some positive signals that happened in the beginning of the year, including appreciation of the GEL, will give good stimulus to the revitalization of separate industries. The overall economic growth is forecasted to reach 2.5% in 2016. Considering the upcoming elections in Georgia and the unstable region, the figure can be considered a positive.
Q. What are the plans of Crystal for 2016?
A. In the first quarter of the current year we successfully completed the second round of attracting international investments. This contributed to significant growth of the company’s financial capacity. Accordingly, we plan to continue market growth, enhance competitiveness, and offer new, innovative products to our customers.