With less than two years left before we have to meet our 2020 deadline of transforming Malaysia into a high income country, our collective focus now has shifted towards our bottom 40 per cent (B40) of households – households with a median monthly income of RM3,000 or less.
All over the country, we are now witnessing both government and private entities attempting to elevate the B40 level – from the unveiling of our 2018 ‘rakyat friendly’ budget to more roll-outs of affordable private housing developments.
Meeting the needs of our B40 seems to be a national priority right now.
However, while we have taken some strides in addressing the issues of the rising cost of living and affordable housing needs, one industry that seems to be lagging behind in this regard is our financial services industry as our microfinance segment continues to be either out of reach or unsustainable for our B40.
Microfinancing is the provision of loans and other financial services to entrepreneurs that do not have access to normal banking and related services because they lack the collateral, steady employment and verifiable credit history needed for eligibility.
The concept was founded in Bangladesh in 1983 to help their impoverished and soon after, Malaysia began adopting it in 1988 when our Amanah Ikthiar Malaysia (AIM) began providing loans only to the poor to assist them in setting up micro-enterprises.
According to Bank Negara Malaysia’s (BNM) Deputy Governor Abdul Rasheed Ghaffour, since 2000, our microfinance sector’s total outstanding financing stood at about RM151 million.
This has since multiplied by more than 30 times to RM5.2 billion in 2016 – benefitting more than one million micro-enterprises in the country.
Despite these significant strides in microfinancing, Abdul Rasheed believed that our work in microfinance is far from complete as its full potential will not be realised until we observe direct linkages to welfare improvements in the microfinance segment and ultimately, sustainable growth.
He highlighted that one of the key challenges for microfinance in Malaysia other than how to promote financial inclusivity is determining what our micro-entrepreneurs actually need from financial institutions.
“As effective policymakers and practitioners, we need to have deep insights of our clients on-the-ground: the micro-entrepreneurs.
“This obligation begins with the awareness that the needs, trade-offs and circumstances of micro-entrepreneurs are unique, and they face very different financial constraints and in turn, very different choice sets.
“Hence, effective microfinance design that appeals to micro-entrepreneurs’ needs will not only require a rooted understanding of whether they have been good paymasters, who their other financiers are and how they conduct business; but also their specific background, problems and values,” he said in his speech during the 2017 Global Symposium on Microfinance.
To address this issue, Abdul Rasheed said that development of credit analytics such as psychometric assessments and other non-financial information is already underway.
“This may be particularly useful in the micro segment, where traditional data on creditworthiness are usually scarce.
“These insights can also be leveraged to design products that are tailored towards the distinct needs of micro-entrepreneurs,” he added.
With that in mind, it is likely that the development of such credit analytics will require cooperation from local tech giants who may have already amassed pools of relevant information from the local population.
While there is no indication that BNM might be working with such a partner on this endeavour, independently one local tech giant has just recently begun leveraging on their own data assets to develop an alternative form of credit assessment.
Newly launched last month, Grab Financial Services Asia (GFSA) is a joint- venture between Grab and Credit Saiso Co, one of Japan’s largest consumer financing companies.
According to Grab, the aim of GFSA is to encompass all of Grab’s fintech offerings and provide loans and lending services to millions of unbanked and underbanked consumers, micro-entrepreneurs and small businesses across Southeast Asia.
The financial platform is understood to leverage off Grab’s reach to millions of Southeast Asian consumers, micro-entrepreneurs and small businesses, and vast datasets on consumer behaviours, as well as Credit Saison’s expertise in credit analysis and consumer lending, to offer micro-financing products and services tailored specifically for Southeast Asia’s fastest growing economies.
By tapping into the huge cache of data gathered from their transportation, on-demand food, fintech and delivery services offered across 191 cities in 8 countries in Southeast Asia, Grab guides that they will be able to analyse behaviour and transaction data from the app, such as transport movements, geo-location, and GrabPay transaction data.
The information gathered can then be used to offer alternative data points to assess credit worthiness, filling the gap left by traditional credit scoring methods and allow the GFSA to be able to offer a range of financial products such as working capital loans and goods financing to suit the needs of Grab drivers, agents and merchants.
Beyond just utilising this new method of credit assessment for their own products, Grab has also announced that they will be offering credit scoring services to traditional financial institutions and enable them to unlock new opportunities in various sectors that may have been neglected due to the absence of reliable credit information.
“The new joint venture, GFSA, puts in place a much-needed infrastructure that will accelerate financial inclusion in Southeast Asia. Many in our region have no access to loans that they can use to purchase a new home or grow their small business.
“GFSA is building a reliable alternative to traditional credit scoring methods that is customised for the unbanked majority of consumers and small businesses in Southeast Asia, which will create economic opportunity for millions across the region,” said Jason Thompson, Managing Director, Grab Financial, and Director, Grab Financial Services Asia.
Over commercialisation concerns
While Grab’s efforts to help service the microfinance segment would likely help boost the welfare of our local micro-entrepreneurs, there have also been some concerns that the segment is becoming over-commercialised.
In an interview with BizHive Weekly, Jared Lim, the founder and chief executive officer (CEO) of Loanstreet, voiced his concerns over the current landscape of our microfinance segment.
Lim said that the segment is far from perfect as it is still coming from a commercial angle rather than an angle of social welfare and self-sustainability.
“I think BNM has been pushing for the segment to be more focused on social welfare by encouraging microinsurance; however on microlending itself, I’m not too sure if it’s being done for the greater public good as it is still overly commercial.
“As microlending is designed to enable impoverished borrowers to start their own businesses and help them get out of poverty, it is not in the spirit of microlending for banks and enterprises to enter into the segment with a goal of profiteering rather than facilitating for social progress,” he said.
To note, Loanstreet is a cloud based end-financing management platform and an independent Malaysian financial products comparison website.
For Grab’s venture into microlending, Lim hailed the move as a potentially positive one as their microloans to their drivers would help keep current drivers on the roads while also opening up more opportunities for rural and hardcore poor folk to gain a reliable income by driving.
Source: Loanstreet
High interest rates
One of the key complaints about microfinancing is that its interest rates are far too high and are aimed at turning a profit for financial institutions rather than helping the poor get themselves out of poverty.
In Malaysia, the bulk of our microloans sit around a flat rate of 8 to 11 per cent for Government Banks and an annual rate of 20 to 35 per cent for commercial banks.
While this is lower than the global microfinance average interest and fee rate of 37 per cent and much lower than the shocking 70 per cent seen in certain markets, some argue that this is still a case of banks profiting over the poor as they may end up poorer as a result of accepting the loans should their business venture fail in earning a higher rate of return than the high interest rates.
However, many microfinance practitioners have argued that the high interest rates are a necessity as the cost of making each loan cannot be reduced below a certain level while still allowing the bank to cover costs as the credit risk for microfinance consumers are very high and may need years to improve their livelihood and pay back their loans.
CSR value for thought
Understandably, as an entity, it is the banks job to ensure that they are profitable but Lim argued that microfinancing is a social objective and should be seen a corporate social responsibility (CSR) effort rather than a financial product that needs to meet profitability or break even thresholds.
“Rather than spending money to embark on other CSR initiatives, I would think it would be a better idea for banks to undertake microlending for social good instead.
“Because anyone can donate money, but only banks and other financial institutions have the necessary resources to be able to run something as high impact to our society like microlending. It is a space where no one else can go and a chance for them to help lift our poor out of poverty.”
Adding to that, Lim also highlighted that the efforts into running microlending as a CSR initiative would also ultimately add value back into the entire organisation through positive branding and stakeholder value creation.
Addressing the issue of credit risk with different approaches
Not ignoring the need for better controls to reduce credit risk, Lim acknowledged that tech companies like Grab with their data assets could definitely help with better credit worthiness assessments of microloan applications in Malaysia.
That being said, he noted that for Grab’s method of credit worthiness assessment may end up leaving out some of the folk in rural areas that they likely do not have info on.
Taking examples from microfinance segments around the world, Lim suggests that simple measures could be put into place to improve the issue of credit risk in microlending such as targeting loans to women rather than men.
The idea to target loans to women stems from evidence that shows that women are less likely to default on their loans than men as women would tend to take safer routes in business to ensure a steady income while men would take riskier routes to increase profitability.
Additionally he added that banks could also consider taking a different approach to assessing credit such as a more hands on approach loan approval.
“Traditionally, a bank manager in a large area would be in charge of loan approvals and they might have no idea how their applicants are so just basing off approvals over applications with the lenient eligibility of microloans can leave a bank with high non-performing loans which causes them to drive up interest
rates even higher to compensate.
“But if the process is given to someone deeply ingrained in a community, someone with more social clout among
its populace, then a more accurate way to determine credit worthiness can take place.”
Advice for micro-entrepreneurs
When asked what his advice would be for micro-entrepreneurs looking for financial solutions, Lim said: “The biggest thing I would say is to look for a lender that is a bit more understanding to your situation.
“Government owned banks like the Agro Bank who has more of a development focus might be a better bet as they tend to offer better products in the microfinance segment as compared to commercial banks.
“Next, I would suggest looking at your interest rates, of course lower is better so it would be wise to shop around.
“Then finally if you can compare the rates again with a personal loan to see whichever is cheaper as you can probably get a cheaper personal loan if you qualify for it
rather than a microfinance package.
“I think the general rule of thumb is that personal loans will have lower interest rates, but that is not always going to be true as some banks
might have cheaper alternatives as well.”
Eye on affordable micro-insurance
After exploring the depths of our microfinance segment, there is room for improvement in how we can handle our microlendings but its future looks positive as both public and private sectors have begun attempting to service the segment with more innovative financial products while managing its associated risks with non-traditional methods.
It might still be a while before our microlendings can improve for the betterment of our B40, but at least in the arena of microinsurance, the insurance industry has already rallied together with BNM to make significant strides in offering affordable credit to Malaysian citizens.
In conjunction with Bank Negara Malaysia (BNM), the Life Insurance Association of Malaysia (Liam), Malaysian Takaful Association (MTA) and General Insurance Association Malaysia (Piam) brought out a new affordable term insurance plan at the end of Nov 2017 under the name – Perlindungan Tenang (PT).
Under PT, consumers can expect to get insurance coverage for as low as RM2.75 per month with maximum pay-outs of RM50,000.
According to LIAM’s vice president Ramzi Toubassy, the aim of the program is to help meet the insurance coverage gap in Malaysia by providing a product that is highly accessible and affordable to the masses.
“Only 34 per cent of Malaysians have any ty pe of insurance coverage, leaving 8 million lower income households and 700,000 micro-enterprises within Malaysia to be vulnerable against unforeseen circumstances.
“These households and enterprises need protection so it is our moral obligation to reach them. And the way we will do so is through this new product (PT) which is very simple, very accessible and very easy to understand.
“It is not complicated at all and for a small fee ranging from around RM3 to RM10, you will be able to get the coverage that you need,” he said to reporters at BNM’s Karnival Kewangan 2017 event in Kuching.
Stepping stones to bigger coverage
While the maximum RM50,000 coverage may not be enough for some, Toubassy guided that the PT plans are to act as a stepping stone to allow Malaysians to get some sort of coverage first and when they are familiar with insurance products, provide them with a product that will better suit their needs.
Besides just helping the underinsured, Toubassy added that the new affordable plans will also be a huge benefit to our economy and society as a whole.
“The more people that have insurance, the less burden they are on the economy, because if they have coverage, they can maintain the same standard of living in the event of an accident, and not be a burden on the economy.
“Hence, I think we are playing a very good role in helping the Malaysian economy and society.
“Because everyone has plans – children will need to go to school, people rely on certain levels of income – and if we are able to reach that level we will be able to help the economy,” he shared.
With the launching of the new PT plans, Toubassy asserts that they (insurance industry) will be working towards reducing the protection gap and insuring 75 per cent of the Malaysian population by 2020.
“We hope that by starting with the lower to middle income groups, we can slowly but surely reach our goal.
“Even if you’ve missed our 2020 deadline, we will keep trying until we have 75 per cent of the population insured, because it is our moral obligation and civic duty to do so,” he declared.