by Alexander Oleinic
To safeguard the interests of both borrowers and microlenders, government-controlled CNPF also plans to tighten its supervision of the operations of the microfinance organisations (MFOs) doing business in the country. These plans do not make all MFOs happy but they are necessary to make sure all lending institutions in Moldova play by the rules.
The credit portfolio of savings and loan associations, or lending cooperatives, in Moldova is expected to reach 700 million lei in 2014 from 254.2 million lei in 2011 under the financial market development strategy blueprint of CNPF. Savings and loan associations have a smaller client base compared to MFOs as they offer loans to their members only.
Microfinance has become popular with both small businesses and households in Moldova over the last few years. Small and medium-sized enterprises (SMEs) represent 97.5% of all companies registered in Moldova, a country with a population of 3.56 million.
While SMEs apply for loans from microfinancing organisations to develop their businesses, individuals seek microloans for household consumption purposes, for buying real estate or for covering expenditures related to healthcare or education. The microfinance market in Moldova is offering a wide range of lending opportunities for these purposes.
Clients, who usually apply for a microloan, are mainly people from rural areas where bank offices are scarce, or people who do not need a big loan or want to avoid the more complicated and time-consuming procedures of borrowing from a bank, with MFOs in Moldova approving loan applications in less than an hour.
Big client base
The credit portfolio of savings and loan associations, or lending cooperatives, in Moldova is expected to reach 700 million lei in 2014 from 254.2 million lei in 2011 under the financial market development strategy blueprint of CNPF.
Supported by a big client base among local SMEs and households, the microfinancing organisations enjoy a comfortable working environment and it is no wonder that their number rose to 48 at the end of 2011 from 29 two years earlier.
The first MFOs sprung up in Moldova in 1997 as savings and loan associations. Founded mostly in rural areas, they depend mainly on external funding which comes from big microlenders like Microinvest or Corporatia de Finantare Rurala.
Currently, there are about 390 savings and loan associations in Moldova with a total of some 120,000 members which is about 42 times more than in 1998. With microloans mainly invested in agriculture, savings and loan associations play an important role in financing the business and household consumption needs of Moldovan farmers. The credit portfolio of these lending cooperatives reached 254.2 million lei in 2011 from 244.2 million lei a year earlier, CNPF figures show.
On the downside for these microlenders, however, is the low business culture of their borrowers who often end up unable to repay their loans because they lack entrepreneurial and management skills to run their own business.
Another problem these associations have to cope with is the high level of their dependence of external funding which prevents them from developing properly and from creating a good image of themselves, CNPF said in its financial market development strategy blueprint in 2011. Combined with the fact that 70% of the microcredits which come from savings and loan associations are short-term loans, it has a negative impact on their development.
MFOs, which make microlending available for business and consumption purposes in both urban and rural areas, increased their loan portfolio by a hefty 21% to 1.44 billion lei in 2011. Their combined net profit registered a 34.5% increase on the year to 114.6 million lei at end-2011, even though 11 of them posted net losses, the highest single one being 25.5 million lei.
The current year has not been so bright. Posting 251,000 lei in combined net profit at the end of January, MFOs swung to a combined net loss of 760,000 lei in the first four months of 2012, according to CNPF data. The loss was due mainly to the economic crisis which dampened consumption of the population – a major target for the loans offered by MFOs.
Growing competition
The current year has not been so bright. Posting 251,000 lei in combined net profit at the end of January, MFOs swung to combined net loss of 760,000 lei in the first four months of 2012, according to CNPF data.
The rising popularity of MFOs in Moldova has made big commercial banks in the country start offering a range of microfinancing options on the same terms like MFOs.
“MFOs are not the only organisations specialised in microfinancing, banks also offer microcredits, so in terms of microfinancing in Moldova it is hard to make a difference between banks and MFOs, they have the same client base which includes individuals and SMEs,” says financial consultant Alexandru Savva. “Banks, however, set more difficult conditions because of some requirements imposed by the state and their supervisors, while MFOs try to work in a easier way and to be more mobile and accessible. At the same time, because of some simplified procedures, the MFOs have to assume more risks.”
MFOs extend loans under more relaxed conditions compared to commercial banks which has enabled them to grow fast and develop. For example, the law regulating the operations of MFOs gives them more leeway in setting the terms for providing microcredits. At the same time, as the MFOs are not required to stick to the more stringent lending conditions of commercial banks, they charge a big number of commissions and fees, of which the borrower is not always aware, the organisation for consumer protection in Moldova said in February. To do away with this practice, in May Moldova’s parliament adopted legislation that bans banks, MFOs and other lenders from levying additional fees or charges except for those provided by law, or changing the interest rate for the duration of the loan contract.