Big business in small loans
When Poland's communist system was in its death throes in the late 1980s, Hanna Kowalska set up a company manufacturing reinforced polyester and steel valves, pipes and containers.
She used her own money to finance the venture but by 1996, the company had grown and she needed extra investment.
But no banks would give it to her.
"In the bank where I had kept my company accounts since 1986, I submitted all the necessary documents and my bank still wanted me to give a guarantee," said Kowalska, 54. "But they wouldn't accept what I told them I could offer."
That's when she approached Fundusz Mikro.
Fundusz Mikro was established seven years ago by the Polish-American Enterprise Fund - one of several such funds set up by a special act of U.S. Congress to stimulate the development of private enterprise in the former communist countries of Central and Eastern Europe.Armed with a grant of $20 million from the Polish-American Enterprise Fund, Fundusz Mikro set about lending small amounts of money - usually around zł. 5,000 - for small periods of time - usually around 12 months - to micro businesses, which typically have one to five employees.
Businesses that are typically overlooked by commercial banks.
Fundusz Mikro granted Kowalska and her company, Przedsiźbiorstwo Techniczne Apsel, a 12-month loan of an amount smaller than she requested. Since then Kowalska has taken regular loans from Fundusz Mikro and is currently paying back the zł. 60,000 she borrowed last July.
"I think this is a great form of financing," Kowalska said. "Just about everybody can get a loan and it sure helped me out - from reinvesting in the business to buying a new company car. And the longer I deal with Fundusz Mikro, the better the loan conditions they give me."
Today, according to Chief Executive Officer Witold Szwajkowski, Fundusz Mikro has become Poland's largest micro lender, with 30 branches and 100 employees.
Fundusz Mikro is a non-profit organization but operates in the form of a limited liability company - the only legal form allowed to make interest-bearing loans. Since 1994, the award-winning firm has made almost 50,000 loans worth a total of $90 million to 25,000 micro businesses. The loan default rate is remarkably low, with only $1 million written off as bad debt during the company's life. Around 50% of Fundusz Mikro's customers are small traders and 35% are small service providers. Rural borrowers are almost non-existent, while men account for 60% of all loans and 40% are women.
"We have many success stores," Szwajkowski said. "We have examples of little traders who started with a stall in one of Warsaw's open markets and used micro finance and they now have quite a big shop.
"We have success stories of people using loans to improve the stock in their shop, to redecorate their shop, to buy new machinery or refrigerators. The amounts they borrow look small but for these businesses, they are significant."
Fundusz Mikro has around 10,000 active clients and Szwajkowski estimates there is a healthy core of up to 50,000 entrepreneurs in Poland who could be potential borrowers of a micro loan.
But in Poland's current economic climate, Szwajkowski says the number of micro businesses applying for loans has slowed. Other factors include the breakdown in trade to the East following the 1998 Russian crisis and also the rapid development of huge supermarkets by international networks, Szwajkowski said. An encouraging word
"Right now we are looking at special ways to encourage people to use external financing," Szwajkowski said.
He estimates that around 60% of micro businesses don't intend to borrow or never borrow from financial institutions. So, in an attempt to attract these potential borrowers, Fundusz Mikro is in the process of launching new loan products.
But first some background.
The prototype "micro finance" concept was launched in the 1980s in Bangladesh, by the Grameen Bank, whose target market was people without land or assets. The project was so successful that Grameen Bank disbursed about $2.4 billion to nearly 2.3 million borrowers, with a loan repayment rate in excess of 95%. Around 150 non-governmental organizations, which subsequently launched similar programs in Bangladesh, have disbursed around $260 million.
As in Poland, borrowers are not required to provide any collateral and they need only supply minimal documentation. The application form is just one page long and penalty interest for late payments doesn't exist.
The cost of the loans - which are high due to the small amounts of money lent - are subsidized by Fundusz Mikro, which puts all its operating profit back into the company. In essence, the business operates by putting an emphasis on the principles of partnership and trust. "Commercial banks are not quite interested in this part of the market," Szwajkowski said. "They are interested in bigger companies to which they can make loans starting from around $10,000 and this is the reason why our activity has to be subsidized because it would be impossible to have commercial activity comprising loans of up to $1,000; the cost per transaction would be too high."
The European Union's 2001 Regular Report On Poland's Progress Toward Accession stated that more than 10% of total credit from banks is being directed to Poland's 10 largest publicly listed companies.
But commercial banks are looking at lending in more risky sectors of the market - such as Poland's 3 million small- and medium-sized enterprises - due to increased competition among banks.
But Szwajkowski doubts commercial banks would take as much risk as Fundusz Mikro.
"We are only for people who cannot borrow from commercial institutions," he said.Teaming up
The basic tenet of micro finance is that it relies on something called "mutual collateral." Micro businesses, typically low on assets and collateral, are required to join forces with four other businesses in the local area and apply for loans in a group, with each group member guaranteeing the loans of the other members.
Around 75% of Fundusz Mikro's customers use "mutual collateral" loans. The interest rate is 25% per annum, with a borrower's subsequent mutual collateral loans being reduced by 1.5% per annum.
The interest rate is high compared to commercial bank rates for company loans (around 10-14%) but as Szwajkowski points out, Fundusz Mikro's rates are for unsecured loans, and for small loan amounts.
"If we had to charge commercial interest to cover our operation cost and the cost of capital, we would have to charge twice as much interest, so around 50%," Szwajkowski said.
Around 56% of Fundusz Mikro's loans are for repeat customers - and the longer their relationship with Fundusz Mikro, the larger the loans they are granted and the better the terms.
Szwajkowski doesn't like drawing comparisons with the commercial banking sector, but figures from the National Bank of Poland estimate that 19% of corporate loans in the Polish banking sector are irregular (as of June 2001). Szwajkowski estimates that the Fundusz Mikro equivalent rate would be closer to 13%.Rolling out new products
To attract more customers, Fundusz Mikro has recently created a number of new products such as Mikro Venture Capital. Launched in 2001, this product offers a loan rate of 16% for the first year. At the end of the term, if the business is going well, the loan can be extended and the borrower must pay an additional, voluntary fee, "which emulates profit sharing," explained Szwajkowski.
This year, Fundusz Mikro launched another product called "Partnership Finance" in Łódź, Warsaw and Katowice, and is currently rolling it out across the country. Borrowers only pay interest equivalent to the interest being paid on their savings deposits - about 7%. The borrower is then given the responsibility of estimating how much profit their business will generate using the loan over a certain period and nominates a percentage of this profit to return to Fundusz Mikro - if, and only if, they reach this level of profit.
"If a good cheater realizes that partnership finance' is an opportunity to cheat, he will benefit," Szwajkowski said. "But we believe that after seven years of practice and dealing with borrowers, we are able to select borrowers who really think in terms of relationships, rather than cheating a company that is offering cheap credit."
Partnership finance has created curiosity: Three days after launching in Łódź, the office had 400 inquiries.Of course, all applications are examined thoroughly. A Fundusz Mikro employee visits the business to see how it functions and determine business viability and cash flow. The entrepreneur's motivation for borrowing money is also crucial to the success of his or her application.
"Our target group is people who believe that they have to fulfill an agreement and pay back a loan because it is normal practice for them," Szwajkowski said.
He added that Fundusz Mikro's new loan products also put the focus on business goals, rather than the burden of repaying a loan. They also promote the idea of relationship: that Fundusz Mikro is sharing both the risk, and the profits.
Being a non-profit organization, Fundusz Mikro doesn't advertise and relies on word of mouth and media coverage for new customers. And in an effort to keep overheads low, it is also hard for Fundusz Mikro to grant loans to potential borrowers in isolated areas - the travel expense is not feasible.Well running dry
There is another serious issue looming on the horizon for Fundusz Mikro: Around $13 million of the company's money is tied up in current loans, leaving only $7 million in the kitty. If these new loan products are successful, and the Polish economy begins to pick up, resulting in more loan applications, Szwajkowski predicts that within 12 months Fundusz Mikro could have no more money to lend. He is already looking for potential investors.
"We believe that there are many potential investors - socially orientated investors, such as foundations and also commercial organizations that set up special funds. They call it support development for the community,'" Szwajkowski said. "Really it's an indirect way for these organizations to build markets for the future. For example, an agricultural company may create a fund to support development of rural areas, which means that their products will eventually find more customers in the future."
She used her own money to finance the venture but by 1996, the company had grown and she needed extra investment.
But no banks would give it to her.
"In the bank where I had kept my company accounts since 1986, I submitted all the necessary documents and my bank still wanted me to give a guarantee," said Kowalska, 54. "But they wouldn't accept what I told them I could offer."
That's when she approached Fundusz Mikro.
Fundusz Mikro was established seven years ago by the Polish-American Enterprise Fund - one of several such funds set up by a special act of U.S. Congress to stimulate the development of private enterprise in the former communist countries of Central and Eastern Europe.Armed with a grant of $20 million from the Polish-American Enterprise Fund, Fundusz Mikro set about lending small amounts of money - usually around zł. 5,000 - for small periods of time - usually around 12 months - to micro businesses, which typically have one to five employees.
Businesses that are typically overlooked by commercial banks.
Fundusz Mikro granted Kowalska and her company, Przedsiźbiorstwo Techniczne Apsel, a 12-month loan of an amount smaller than she requested. Since then Kowalska has taken regular loans from Fundusz Mikro and is currently paying back the zł. 60,000 she borrowed last July.
"I think this is a great form of financing," Kowalska said. "Just about everybody can get a loan and it sure helped me out - from reinvesting in the business to buying a new company car. And the longer I deal with Fundusz Mikro, the better the loan conditions they give me."
Today, according to Chief Executive Officer Witold Szwajkowski, Fundusz Mikro has become Poland's largest micro lender, with 30 branches and 100 employees.
Fundusz Mikro is a non-profit organization but operates in the form of a limited liability company - the only legal form allowed to make interest-bearing loans. Since 1994, the award-winning firm has made almost 50,000 loans worth a total of $90 million to 25,000 micro businesses. The loan default rate is remarkably low, with only $1 million written off as bad debt during the company's life. Around 50% of Fundusz Mikro's customers are small traders and 35% are small service providers. Rural borrowers are almost non-existent, while men account for 60% of all loans and 40% are women.
"We have many success stores," Szwajkowski said. "We have examples of little traders who started with a stall in one of Warsaw's open markets and used micro finance and they now have quite a big shop.
"We have success stories of people using loans to improve the stock in their shop, to redecorate their shop, to buy new machinery or refrigerators. The amounts they borrow look small but for these businesses, they are significant."
Fundusz Mikro has around 10,000 active clients and Szwajkowski estimates there is a healthy core of up to 50,000 entrepreneurs in Poland who could be potential borrowers of a micro loan.
But in Poland's current economic climate, Szwajkowski says the number of micro businesses applying for loans has slowed. Other factors include the breakdown in trade to the East following the 1998 Russian crisis and also the rapid development of huge supermarkets by international networks, Szwajkowski said. An encouraging word
"Right now we are looking at special ways to encourage people to use external financing," Szwajkowski said.
He estimates that around 60% of micro businesses don't intend to borrow or never borrow from financial institutions. So, in an attempt to attract these potential borrowers, Fundusz Mikro is in the process of launching new loan products.
But first some background.
The prototype "micro finance" concept was launched in the 1980s in Bangladesh, by the Grameen Bank, whose target market was people without land or assets. The project was so successful that Grameen Bank disbursed about $2.4 billion to nearly 2.3 million borrowers, with a loan repayment rate in excess of 95%. Around 150 non-governmental organizations, which subsequently launched similar programs in Bangladesh, have disbursed around $260 million.
As in Poland, borrowers are not required to provide any collateral and they need only supply minimal documentation. The application form is just one page long and penalty interest for late payments doesn't exist.
The cost of the loans - which are high due to the small amounts of money lent - are subsidized by Fundusz Mikro, which puts all its operating profit back into the company. In essence, the business operates by putting an emphasis on the principles of partnership and trust. "Commercial banks are not quite interested in this part of the market," Szwajkowski said. "They are interested in bigger companies to which they can make loans starting from around $10,000 and this is the reason why our activity has to be subsidized because it would be impossible to have commercial activity comprising loans of up to $1,000; the cost per transaction would be too high."
The European Union's 2001 Regular Report On Poland's Progress Toward Accession stated that more than 10% of total credit from banks is being directed to Poland's 10 largest publicly listed companies.
But commercial banks are looking at lending in more risky sectors of the market - such as Poland's 3 million small- and medium-sized enterprises - due to increased competition among banks.
But Szwajkowski doubts commercial banks would take as much risk as Fundusz Mikro.
"We are only for people who cannot borrow from commercial institutions," he said.Teaming up
The basic tenet of micro finance is that it relies on something called "mutual collateral." Micro businesses, typically low on assets and collateral, are required to join forces with four other businesses in the local area and apply for loans in a group, with each group member guaranteeing the loans of the other members.
Around 75% of Fundusz Mikro's customers use "mutual collateral" loans. The interest rate is 25% per annum, with a borrower's subsequent mutual collateral loans being reduced by 1.5% per annum.
The interest rate is high compared to commercial bank rates for company loans (around 10-14%) but as Szwajkowski points out, Fundusz Mikro's rates are for unsecured loans, and for small loan amounts.
"If we had to charge commercial interest to cover our operation cost and the cost of capital, we would have to charge twice as much interest, so around 50%," Szwajkowski said.
Around 56% of Fundusz Mikro's loans are for repeat customers - and the longer their relationship with Fundusz Mikro, the larger the loans they are granted and the better the terms.
Szwajkowski doesn't like drawing comparisons with the commercial banking sector, but figures from the National Bank of Poland estimate that 19% of corporate loans in the Polish banking sector are irregular (as of June 2001). Szwajkowski estimates that the Fundusz Mikro equivalent rate would be closer to 13%.Rolling out new products
To attract more customers, Fundusz Mikro has recently created a number of new products such as Mikro Venture Capital. Launched in 2001, this product offers a loan rate of 16% for the first year. At the end of the term, if the business is going well, the loan can be extended and the borrower must pay an additional, voluntary fee, "which emulates profit sharing," explained Szwajkowski.
This year, Fundusz Mikro launched another product called "Partnership Finance" in Łódź, Warsaw and Katowice, and is currently rolling it out across the country. Borrowers only pay interest equivalent to the interest being paid on their savings deposits - about 7%. The borrower is then given the responsibility of estimating how much profit their business will generate using the loan over a certain period and nominates a percentage of this profit to return to Fundusz Mikro - if, and only if, they reach this level of profit.
"If a good cheater realizes that partnership finance' is an opportunity to cheat, he will benefit," Szwajkowski said. "But we believe that after seven years of practice and dealing with borrowers, we are able to select borrowers who really think in terms of relationships, rather than cheating a company that is offering cheap credit."
Partnership finance has created curiosity: Three days after launching in Łódź, the office had 400 inquiries.Of course, all applications are examined thoroughly. A Fundusz Mikro employee visits the business to see how it functions and determine business viability and cash flow. The entrepreneur's motivation for borrowing money is also crucial to the success of his or her application.
"Our target group is people who believe that they have to fulfill an agreement and pay back a loan because it is normal practice for them," Szwajkowski said.
He added that Fundusz Mikro's new loan products also put the focus on business goals, rather than the burden of repaying a loan. They also promote the idea of relationship: that Fundusz Mikro is sharing both the risk, and the profits.
Being a non-profit organization, Fundusz Mikro doesn't advertise and relies on word of mouth and media coverage for new customers. And in an effort to keep overheads low, it is also hard for Fundusz Mikro to grant loans to potential borrowers in isolated areas - the travel expense is not feasible.Well running dry
There is another serious issue looming on the horizon for Fundusz Mikro: Around $13 million of the company's money is tied up in current loans, leaving only $7 million in the kitty. If these new loan products are successful, and the Polish economy begins to pick up, resulting in more loan applications, Szwajkowski predicts that within 12 months Fundusz Mikro could have no more money to lend. He is already looking for potential investors.
"We believe that there are many potential investors - socially orientated investors, such as foundations and also commercial organizations that set up special funds. They call it support development for the community,'" Szwajkowski said. "Really it's an indirect way for these organizations to build markets for the future. For example, an agricultural company may create a fund to support development of rural areas, which means that their products will eventually find more customers in the future."
