Credit Product Innovation?

May 2014

CONFIDENTIAL

Our credit products –

• How good are they?

• How competitive are they?

• How well do they solve the client’s needs?

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CONFIDENTIAL

But what is a “good credit product”?

• Strong client demand

• Is competitive in the market

• Is profitable for FINCA

• % rate sufficient to cover cost +

• Can be delivered at sustainable

cost

• Sustainable PAR/default rate

And:

• Satisfies the client’s

needs

• Protects client’s

interests

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CONFIDENTIAL

What is a “good credit product”?

• “Good demand and good results” does not always mean “good product”

• Focus on pushing product through sales channel, rather than focus on offering a better product.

• Internally- focused and process-focused responses, rather than client-focused solutions:

• e.g. LO incentives; LO specialization; demanding high loan output from a one-product-only LO

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CONFIDENTIAL

What is a “good credit product”?

What else can help to push a suboptimal product?

• Misinformation / Lack of transparency• Clients’ lack of financial understanding• Clients’ convenience, and being used to things as they are; fear

of change/new things• Lack of alternatives in the market

* All competitors offer ‘bad’ products* Market players are unable/unwilling to offer something better* All competitors benefit from the status quo, at the expense of

the clients

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CONFIDENTIAL

Case study Azerbaijan

• Strong growth,• Strong profitability• Extremely low PAR, for years

* esp. for small loan sizes and group loans

• So what’s wrong ? ? ?

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CONFIDENTIAL

This is what’s wrong:• Stubbornly high opex ratio

* 2011: opex 22%* 4/2014: opex

20.4%

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Case study Azerbaijan

* pf 85mn; 98k borrowers; 44% yield

* pf 220mn; 153k borrowers; 36% yield;

• Shockingly high client dropout rate: nearly 40%

Why?

Identified two key elements

CONFIDENTIAL

Case study Azerbaijan

1• ABC studies show: Credit analysis (site visits) and credit

committees are the most expensive parts in the credit process. • F/Azerbaijan invests a lot of time and money into information

gathering, verification, and processing

• And what for? • … to sustain an extremely low PAR of 0.1-0.2% (for loans

below $3k) How much sense does this make?

• At the same time, clients dislike the site visit with the credit analysis procedure

• Also, the high opex requires a high(er) interest rate 8

CONFIDENTIAL

Case study Azerbaijan

• 2• Is our monthly instalment loan good for the client? • Yes.

* client can plan repayment in advance; * easy to remember; * easy to accumulate the instalment amount every month; * enforces discipline;* low PAR

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CONFIDENTIAL

Case study Azerbaijan

• But does the monthly instalment loan actually solve the client’s working capital and cash flow management problem? • No. Mostly not.

* Equal monthly instalments are not suitable for managing cash and working capital

So what can a client do in order to manage cash flow and working capital?

– Either postpone/forego an expense/purchase – Or: Get the money from somewhere else, since s/he

cannot get it from FINCA

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CONFIDENTIAL

Case study Azerbaijan

• So F/Azerbaijan is about to pilot a product that tackles these two issues:

No site visit up to $3k for eligible new and repeat clients (the vast majority), just self-reported information

* reducing cost* increasing client satisfaction

Credit line functionality * Provide solution to client for working capital and cash flow

management

• Georgia going farther by using a score to (partly) abolish credit committee.

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CONFIDENTIAL

Case study Azerbaijan

Crucially important, key factors in the credit environment changed for the better over the past 10 years, partly dramatically so:

Availability of reliable and complete information (e.g. credit bureau, asset registry, …)

Much stronger credit cultureStronger rule of law and less corruption (esp. Georgia) More stable economies, more stable and more experienced client

businesses

In other aspects though, the subsidiaries are still way behind: Still no savings, i.e. credit-only, single-product offering No channels besides branches, and partly still working through third-party

banks. (Exception: cash pay-in kiosk terminals)

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CONFIDENTIAL

Case study Azerbaijan – Benefits for clients

• The credit line feature helps to manage and optimize the client’s business/household cash flow.

• The credit decisioning process reduces required time and expenses • Perceive FINCA as a trustful organization, which

o Practices behaviors that foster and atmosphere of trust (e.g. using self-reported financial information; or allowing the client to decide when is the best time to repay the loan)

o Avoids practices that smack of distrust rather than trust (such as the obtrusive credit analysis process)

o Is sincerely interest in understanding the client’s need and providing solutions.

• Potential for lowering interest rates

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CONFIDENTIAL

Case study Azerbaijan – benefits for FINCA

• Improve competitiveness• Reduce client dropout by providing the product that solves the

client’s financial needs• Reduce client dropout by removing/replacing parts of the process

that are burdensome and annoying for the client • Increase efficiency, reduce operating expenses. • Improve profitability, and create potential to reduce interest rates,

and thus create a virtuous cycle

• At the same time, maintain good portfolio quality, but optimize PAR – opex ratio

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CONFIDENTIAL

Now to LAC

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How good are the products in YOUR subsidiary?

What would be the ‘ideal’ product for your clients and your subsidiary?

Let’s brainstorm !