Development and Cooperation


	Contributions from the Column Focus “In the long run, clients will prefer individual loans” Microcredit world record Social control and group solidarity “Prime example of pro-poor growth” Mitigating risks in Uganda Never too little 01/2006		“Prime example of pro-poor growth” Providing credit to small and micro enterprises is the core business of the ProCredit Group, which is made up of 19 banks in transition and developing countries. The group combines a private-sector approach with development aims. The group is steered by ProCredit Holding AG, a Frankfurt-based corporation. Gabriele Heber, a member of the supervisory board, outlines the company philosophy. [ Interview with Gabriele Heber ] How do you define success? Our forte is our coherent model of corporate governance, which enables us to set up microfinance banks in troubled political environments. The model is based on years of experience. Our company Internationale Projekt Consult (IPC), which founded ProCredit, has specialised in this field since the 1980s; we have tried a lot of things. We have consulted with our clients, discussed the results thoroughly in-house and engaged in debate with scholars as well. We now know how to set up a bank in Congo or Kosovo. However, we need legislation that allows us to work in accordance with our system. In places where we are not permitted to do so we don’t get involved in the first place. What should one bare in mind when founding a microfinance bank? In many countries, there is a prevalent culture of favouritism and nepotism. We cannot tolerate that. We cannot appoint people just because they are the brother or brother-in-law of a colleague. Similarly, we cannot allow a situation to arise where relatives or perhaps members of particular political parties receive loans simply because they happen to know bank staff. We need clear, transparent criteria for all such decisions. The staff should be able to understand these standards and apply them as a matter of course. In practice, we constantly have to make sure that rules such as “the most qualified person gets the job” are followed. That is one of the reasons why we require two colleagues from Germany in the management of each ProCredit Bank. In what sense have things evolved differently from what you imagined 20 years ago? Back then, we would never have dreamed of centrally managing an international bank group from a head office in Frankfurt. ProCredit Holding is based here in the same building as is IPC. The executive board runs the business. To some degree, this fact is not in line with the principle of local ownership, but we will continue to work this way because doing so has proven effective. However, we are rooted in the countries we work in because we set up ProCredit Banks with local staff. Without these people, we would not understand the local conditions and could not accurately assess the debtors. In that sense, we are true to our development principles. ProCredit has grown quickly in recent years and is now present in 19 countries. Does your work suffer from the rate of expansion? On the contrary, I think it is getting better and better. The larger network enables us to better compare situations internationally. This is particularly useful for promoting South-South exchange. This year, we will even start our own bank academy in order to systematically train staff from different countries. The courses will run for three years and the participants will come here for seminars periodically during that time. The graduates will become key management members of ProCredit Banks in the various countries. Don’t you worry that other banks could poach your employees? That is already happening now. But our banks are attractive employers, even if they do not pay the highest salaries. ProCredit has a worthy mission, offers interesting perspectives and cultivates a working environment emphasising transparency, communication, responsibility and long-term sustainability. Our staff appreciate that – and we offer qualified staff good career opportunities. We take interest in the worries of our staff and try to resolve any problems. For instance, if two people in a bank fall in love, this must be dealt with in a competent manner. It is best to discuss the situation openly and find solutions that are acceptable for all – for example, letting the two persons concerned work in different departments in future. You are obviously quite good at in-house institution building. But what about the environments your banks work in? Trustworthy entrepreneurs are probably rare in crisis regions. How do you find your customers? It is easier than you probably think. Go to any large market in a so-called poor country, and there will surely be some traders with ideas on how to advance their business with some small investment. Similarly, agriculture offers many opportunities to boost productivity with relatively small input. If you want to finance other businesses, however, you may have to look a little longer; but you will find some interesting options. What collateral can the customers offer? Sometimes none at all, sometimes they have personal possessions which we accept. But our fundamental challenge is to assess debtors accurately. ProCredit employees have to take a look at both the business and family situation – because that distinction is normally blurred in small enterprises. Our loan officers have to work intensively with the people and analyse their business outlook. Most customers do not have formal business data. Of course, they know what they are doing. They have a feeling for whether something will work out or not; and they can express their ideas. But they do not have any formal commercial training and they use their own terminology. That is the reason why microfinance is so personnel-intensive… ...with the result of high interest rates. What does a ProCredit loan cost? There is no such thing as the ProCredit loan. We offer loans in various amounts. A loan of ¤3,000 will, on average, cost 17% annually in the Balkans, 22% in Latin America and 35% in real terms in Africa. And despite the high interest rate, your loans make viable investments possible? Yes – and the payment ethics of our debtors are very good. You see, we often offer the only professional option for founding or expanding a business. People rate such services very high. Essentially, you are doing what local savings banks and credit cooperatives did in Germany in the late 19th century: lending to farmers and tradesmen and thus enabling them to invest in their businesses. There are parallels. We want to run “banks for the general public”, providing ordinary people with access to the financial system. We seek to improve the opportunities for small businesses because their success not only benefits owners but also stimulates the economy as a whole. Our clients create purchasing power, they hire staff, they sell products and services that are in local demand. This is a prime example of pro-poor growth. Do you know how many jobs ProCredit has indirectly created? No, we don’t collect any such data. We are experts in finance and that is what we focus on. The ProCredit group itself, however, has created some 8,000 jobs in its banks, predominantly in countries where there were few prospects for the population. That, in itself, is already a considerable achievement. Is ProCredit a profit-maximising undertaking? I wouldn’t say so. Our strategy is to balance the profit motive with developmental goals. We always stress that we want to make a moderate profit. Profitability is a sign of a company’s health. If it is to stay in business in the long run, it is obvious that it cannot make losses. But whenever we feel that the profit is becoming too high, we consider what to do with the money. For example, we may lower our interest rates or invest in new branch offices to take our product range to other regions. Do all ProCredit banks operate profitably? We strive to do so. Sometimes it takes a while before we make it. In Mozambique, for example, we still have not managed to become profitable after five years of being in business. But we will endure. We have been quicker in other countries, sometimes we have reached profitability within two years. Have you ever withdrawn from a country? Yes, we left the Philippines after two years. Our local partner, a bank that held the majority of shares, did not support our policy. Some multinational banks are pouncing on the buzzword “microcredit”. Are they competitors? Our business is certainly too labourious for multinational corporations. They probably talk about microcredit because doing so is trendy at the moment. But in the long run, going where we operate isn’t worthwhile for those companies. It’s a different matter, however, if large banks from the target countries show interest in our segment. I consider them quite relevant – and IPC still makes around 50% of its turnover from consultancy work for this kind of project. But isn’t it normally said that “greenfielding” is easier than “downscaling”? The first term stands for founding new microfinance institutions, the latter for opening up established institutes to wider sections of the population. I wouldn’t say so. The crucial factor is whether or not the top management is serious about doing business. If the leaders want to branch into microfinance and pursue that goal doggedly, they are likely to succeed. Aside from loans, what services should a microfinance bank offer? For loans you need money, which means you almost inevitably run a deposit business. In fact, that was how IPC originally got into microfinance – Peruvian savings banks wanted to know how they might encourage people to save. That line of business is not particularly profitable, but it does contribute to providing a bank with a source of onlending funds. Moreover, it offers customers interest payments and security they would otherwise not enjoy. Cashless payments are also not very profitable but they are useful for the customers. That is particularly true of international transfers. Many customers have relatives abroad. Is it a coincidence that your head office is in Frankfurt, Germany’s financial-sector hub? It is a coincidence; we actually have nothing to do with the highrises down town. Of course, contact with KfW development bank in Frankfurt is important today as they are shareholders in ProCredit Holding. But basically, we could just as well work in any other city in Germany. The biggest shareholder is a private-sector foundation from the Netherlands. But when you need to raise funds, you access the capital market with the help of Deutsche Bank, the biggest commercial bank in the country. ProCredit Holding is doing business with Deutsche Bank, not IPC. Thanks to the Holding’s investment grade rating, obtained a year ago, it has become easy to issue bonds. And IPC needs money, too. We always want to own roughly a quarter of the shares in ProCredit Holding – and since ProCredit is growing fast, there is a consicerable need for funds. We will soon be issueing bonds for the second time, investors can sign up until 28 February 2006. Questions by Hans Dembowski. Gabriele Heber is a co-founder and manager of the consultancy Internationale Projekt Consult GmbH (IPC) and a member of supervisory board of ProCredit Holding AG. IPC currently holds 24% of the Holding shares. Other important shareholders are the lottery foundation DOEN from Amsterdam (approximately 28%), the KfW banking group (11%) and the Netherlands Development Finance Company FMO (over six percent). heber@ipcgmbh.com http://www.ipcgmbh.com http://www.procredit-holding.com