Sugarcane
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Financial inclusion covers the full spectrum of financial services. In my previous article, The imminent financial revolution (December 3), I covered savings and insurance. The single largest need of the low income segment is access to capital, which they need to create or enhance their business. In the world of microfinance, as little as Rs10,000 can make a difference in the quality of life of a borrower. Unfortunately, this is easier said than done, as access to credit is a challenge experienced in most developing countries, and Pakistan is no exception. The business matrix of commercial banks precludes them from servicing this segment of society. The erroneous assumptions are that small loans will have a higher default rate, must be collateralised and cannot be profitable. All three are creations of a lazy business model and quite divorced from reality.
To the contrary, in fact, the microfinance industry has demonstrated on a global basis that small loans incur a very low incidence of loss even when unsecured. In Pakistan the loss norm is below one percent, a far cry from the non-performing portfolios of corporations and SMEs. The challenge in any small-sized business is scale or, in other words, volume. How does one sell enough sachets, for instance, as opposed to bottles, to make the venture profitable? The solution lies with creating a business model which takes this challenge into consideration.
Although the Pakistani microfinance industry is experiencing fast growth, it currently only has 2.2 million credit customers. This is barely scratching the surface of this iceberg, as the potential is 30 million borrowers. The principal reason is that the industry still does not have enough banks or providers, which can achieve the kind of volumes needed to make a financial impact.. This is because the industry suffers from inadequate capital and access to funding. However, recent developments in which the Telcos and the microfinance banks have come together to find a new business model jointly offers hope for the future of microfinance.
This union has the advantage of combining the vast agent network as well as the mobile subscription customers of the Telco to the credit expertise of the microfinance bank. Tameer Bank is already working on two types of scoring models which will make it possible for small loans to be approved for individuals as well as small shops and retailers in a cost effective manner. The first model is looking at the Telco customers and developing an algorithm which looks at non-credit indicators of a cell phone user. By data mining the usage, as in indexing the number of top ups, travel zone and frequency of calls, the model will forecast the incidence of loss. Tameer will then be able to pre-approve small loans with short tenures. The repayment would be done through the Easypaisa retail network, or the mobile account. No lengthy verification process, or one page loan agreement, and no waiting for approvals.
In a universe of 110 million mobile phone users, if one assumes that the industry has achieved just 5 percent penetration , this projection translates into 5.5 million additional customers. This is twice the size of the existing microfinance outreach. If we further assume an average loan of Rs10,000 under this credit programme, an incremental Rs50 billion could be made available to low income, but bankable customers. Add the multipler effect and you start to make inroads in financial exclusion, reduce unemployment, and affect GDP growth as well.
Safety nets are designed by governments to tide the needy during trying times. Yet, there is nothing stopping the private sector from providing this service on a financially sustainable basis. We have already discussed the solutions for savings, loans and accidental life insurance for the low income segment. We need to add another essential ingredient to complete the menu of services that form a universal index of fundamental entitlements as a human right. To allow citizens to reach their first potential it is essential that a low cost health insurance product also be provided.
A recent study compiled jointly by the Securities and Exchange Commission of Pakistan (SECP) and the World Bank estimates potential demand for 32 million health insurance policies. However, if one also includes dependents, then the potential health micro insurance market could be two to three times larger to assume the size of a 80 million policies. The current health insurance industry outreach is estimated at less than 4 million, which is after the recently issued BISPs health policies. The reason for this abysmal penetration rate is the same as the one applicable to the loan market.
The current providers of health insurance, ie the large insurance companies still act like large commercial banks. This means that they are yet to create a distribution model which allows this business to be profitable for them. To address this segment they must leverage the microfinance/Telco rural footprint and create an enabling eco system. This eco-system would consist of hospitals in rural areas, equipped with 24-hour call centres with doctors available to guide the customers. Lastly, a major awareness campaign would need to take place.
Tameer Bank, in conjunction with its partner, Asia Care, introduced the first stand alone health care product for the low income segment with an emphasis on the rural population. Asia Care is a small, specialised health care insurance company that has created the appropriate hospital network and back up service. The policies are sold through Tameer Bank branches in the first phase.
The SECP is aware of the challenges associated with expanding the outreach to the micro insurance segment. The objective is to create an enabling environment. As a result a task force has been created which will create specific regulations for servicing the low income segment. Prudential regulations for micro-insurance companies similar to microfinance banks will be created.
Where then, do we stand today? Clearly, an enabling environment is being created. Visionary players that can make an impact have started to emerge. At this rate of growth, in five years time it is likely that the financial landscape will substantially change. A combination of microfinance and branchless banking could reduce financial exclusion by 20 percent, thereby increasing GDP growth by three percent, and creating a million new jobs. This is a transformational project which will change millions of lives on the ground. The future lies in investing in the bottom of the pyramid.
The writer is the founder, CEO and president of Tameer.
A transformational project - Nadeem Hussain
To the contrary, in fact, the microfinance industry has demonstrated on a global basis that small loans incur a very low incidence of loss even when unsecured. In Pakistan the loss norm is below one percent, a far cry from the non-performing portfolios of corporations and SMEs. The challenge in any small-sized business is scale or, in other words, volume. How does one sell enough sachets, for instance, as opposed to bottles, to make the venture profitable? The solution lies with creating a business model which takes this challenge into consideration.
Although the Pakistani microfinance industry is experiencing fast growth, it currently only has 2.2 million credit customers. This is barely scratching the surface of this iceberg, as the potential is 30 million borrowers. The principal reason is that the industry still does not have enough banks or providers, which can achieve the kind of volumes needed to make a financial impact.. This is because the industry suffers from inadequate capital and access to funding. However, recent developments in which the Telcos and the microfinance banks have come together to find a new business model jointly offers hope for the future of microfinance.
This union has the advantage of combining the vast agent network as well as the mobile subscription customers of the Telco to the credit expertise of the microfinance bank. Tameer Bank is already working on two types of scoring models which will make it possible for small loans to be approved for individuals as well as small shops and retailers in a cost effective manner. The first model is looking at the Telco customers and developing an algorithm which looks at non-credit indicators of a cell phone user. By data mining the usage, as in indexing the number of top ups, travel zone and frequency of calls, the model will forecast the incidence of loss. Tameer will then be able to pre-approve small loans with short tenures. The repayment would be done through the Easypaisa retail network, or the mobile account. No lengthy verification process, or one page loan agreement, and no waiting for approvals.
In a universe of 110 million mobile phone users, if one assumes that the industry has achieved just 5 percent penetration , this projection translates into 5.5 million additional customers. This is twice the size of the existing microfinance outreach. If we further assume an average loan of Rs10,000 under this credit programme, an incremental Rs50 billion could be made available to low income, but bankable customers. Add the multipler effect and you start to make inroads in financial exclusion, reduce unemployment, and affect GDP growth as well.
Safety nets are designed by governments to tide the needy during trying times. Yet, there is nothing stopping the private sector from providing this service on a financially sustainable basis. We have already discussed the solutions for savings, loans and accidental life insurance for the low income segment. We need to add another essential ingredient to complete the menu of services that form a universal index of fundamental entitlements as a human right. To allow citizens to reach their first potential it is essential that a low cost health insurance product also be provided.
A recent study compiled jointly by the Securities and Exchange Commission of Pakistan (SECP) and the World Bank estimates potential demand for 32 million health insurance policies. However, if one also includes dependents, then the potential health micro insurance market could be two to three times larger to assume the size of a 80 million policies. The current health insurance industry outreach is estimated at less than 4 million, which is after the recently issued BISPs health policies. The reason for this abysmal penetration rate is the same as the one applicable to the loan market.
The current providers of health insurance, ie the large insurance companies still act like large commercial banks. This means that they are yet to create a distribution model which allows this business to be profitable for them. To address this segment they must leverage the microfinance/Telco rural footprint and create an enabling eco system. This eco-system would consist of hospitals in rural areas, equipped with 24-hour call centres with doctors available to guide the customers. Lastly, a major awareness campaign would need to take place.
Tameer Bank, in conjunction with its partner, Asia Care, introduced the first stand alone health care product for the low income segment with an emphasis on the rural population. Asia Care is a small, specialised health care insurance company that has created the appropriate hospital network and back up service. The policies are sold through Tameer Bank branches in the first phase.
The SECP is aware of the challenges associated with expanding the outreach to the micro insurance segment. The objective is to create an enabling environment. As a result a task force has been created which will create specific regulations for servicing the low income segment. Prudential regulations for micro-insurance companies similar to microfinance banks will be created.
Where then, do we stand today? Clearly, an enabling environment is being created. Visionary players that can make an impact have started to emerge. At this rate of growth, in five years time it is likely that the financial landscape will substantially change. A combination of microfinance and branchless banking could reduce financial exclusion by 20 percent, thereby increasing GDP growth by three percent, and creating a million new jobs. This is a transformational project which will change millions of lives on the ground. The future lies in investing in the bottom of the pyramid.
The writer is the founder, CEO and president of Tameer.
A transformational project - Nadeem Hussain
