New Field Partner in Mongolia, Transcapital, Charging Excessive Interest

[Guest]

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[Amy-in-PHX]

I almost made this loan, attracted by the beauty of Batjargal Damdinsuren's
furniture, his smile, his ushanka ( ), and the loan write-up in general.
Then I checked out the field partner, Transcapital.  It just went live on
Kiva in late December, 2010.  The average interest and fees Transcapital charges
to its clients is 48.2%, compared to 21.2% median for its peers in Mongolia.
Worse, Transcapital generates profit of 22.9% on its microloan portfolio --
compared to a 1% median profit for its peers.

In my opinion, this is unconscionable, and this "Field Partner" does not
deserve the interest-free use of my funds.  Does anybody know facts that
would change the picture for me?  (I notice that this loan is already about
half funded, though it was just posted today, so evidently there are many
who are willing to lend here.)  The loan url is:  http://www.kiva.org/lend/276562

[cjp1973]

I almost made this loan, attracted by the beauty of Batjargal Damdinsuren's
furniture, his smile, his ushanka ( ), and the loan write-up in general.
Then I checked out the field partner, Transcapital.  It just went live on
Kiva in late December, 2010.  The average interest and fees Transcapital charges
to its clients is 48.2%, compared to 21.2% median for its peers in Mongolia.
Worse, Transcapital generates profit of 22.9% on its microloan portfolio --
compared to a 1% median profit for its peers.

In my opinion, this is unconscionable, and this "Field Partner" does not
deserve the interest-free use of my funds.  Does anybody know facts that
would change the picture for me?  (I notice that this loan is already about
half funded, though it was just posted today, so evidently there are many
who are willing to lend here.)  The loan url is:  http://www.kiva.org/lend/276562

I am not going to try and influence whether you loan to a certain MFI or not, we all have our own criteria.

Here are two things I saw on the FP page:

The institution has received “The Best NBFI Business Excellence Award” from the Mongolian National Chamber of Commerce and Trade from 2004-2009. It also received “The National Best Micro Finance Organization” from the “Grand Expo-2009”, Mongolian Marketing and Management Academy.

Transcapital will direct the net profits, generated from Kiva clients, solely for well-thought out social performance activities to alleviate poverty.

[Amy-in-PHX]

I am not going to try and influence whether you loan to a certain MFI or not, we all have our own criteria.

That is why my request was for "facts" that I could take into account, which I might have overlooked.

Here are two things I saw on the FP page:

The institution has received “The Best NBFI Business Excellence Award” from the Mongolian National Chamber of Commerce and Trade from 2004-2009. It also received “The National Best Micro Finance Organization” from the “Grand Expo-2009”, Mongolian Marketing and Management Academy.

Transcapital will direct the net profits, generated from Kiva clients, solely for well-thought out social performance activities to alleviate poverty.

Thank you, Charmaine, you directed my attention to some sentences I had overlooked, in reviewing the info on the partner page.  The representation about using the profits from Kiva loans for "social performance activities," while important, is too vague for my comfort.  Consequently, I wrote to Amber Barger, Kiva Fellow working in Mongolia with Transcapital and others, to ask whether she could tell me more.  (Or tell us all more, via the blog posts or partner updates, etc.)  I hope she can verify the field partner's statement and provide a few specifics.  Absent that, my decision not to lend to this field partner has not changed.  (Meanwhile, the particular loan I posted above was fully funded by other Kiva lenders.)

[Amy-in-PHX]

I have reproduced below, the reply I received to my inquiry about Transcapital's promise that it "will direct the net profits, generated from Kiva clients, solely for well-thought-out social performance activities to alleviate poverty."  Specifically, I asked the Kiva fellow currently working with Transcapital (and other MFIs) in Mongolia, (1) whether Transcapital is actually accounting for profits from "Kiva loans" separately from its other profits, and (2) what "well-thought out social performance activities" are being accomplished with such profits.

Amber, the Kiva Fellow, forwarded my message to Kiva staff.  The reply I received was from Ali Price.  As you can see, Ali chose not to respond to the questions I asked, at all.  Her reply concerns the MFI's high cost of operations - but that is already taken into account in the figures for its profit margin.  This Field Partner is a for-profit entity, and its profit margin is far higher than its peers in Mongolia.  Kiva is not able to provide any support for its statement regarding the "social" uses of the profits from Kiva loans.  This entity will get no interest-free capital from me.


Hi Amy,

Amber passed your message on to me and asked me to respond to you. Transcapital is a pilot partner of Kiva's, and they're not as developed as Credit Mongol or XacBank (Kiva's other two Field Partners in Mongolia). Because they're less developed and haven't been as well-funded as Credit Mongol or XacBank, they have additional hurdles to overcome that make giving loans more complicated and expensive for them. For example, Transcapital doesn't have internet access at any of its 11 branches, so loan officers must travel all the way to their headquarters to have meetings and record information. With funding from Kiva and help from Kiva Fellows, we hope that we will be able to catalyze change for Transcapital and help them to operate more efficiently.

If you have any questions about this, please let me know, and I will be glad to help you out.

Best,
Ali Price

 

    On Sun, Feb 27, 2011 at 10:51 AM, Amber Barger <amber.barger@fellows.kiva.org> wrote:

        Dear Cissy,

        I received this message from a Kiva lender today. How should I respond? Or should I send it over to the customer service department?

        Hi Amber!  I am writing you, because I almost made a loan today to an entrepreneur through Transcapital, in Mongolia.  I hesitated, though, when I saw that the average interest and fees Transcapital charges to its clients is 48.2%, compared to 21.2% median for its peers in Mongolia.  Worse, Transcapital generates profit of 22.9% on its microloan portfolio -- compared to a 1% median profit for its peers.  While 1% is probably too low for a for-profit business, I can't justify lending my money interest-free to someone who is going to use it to make a loan on which the borrower will pay 48%.  I wrote about this on KivaFriends.org, and someone replied, pointing out that on its Field Partner page on the Kiva site, Transcapital says that it "will direct the net profits, generated from Kiva clients, solely for well-thought out social performance activities to alleviate poverty."  Which brings me to you, the Kiva fellow working with Transcapital.  Can you flesh out that statement at all?  Is there any actual accounting directed to identifying the profits from Kiva loans, separately from other profits?  What social performance activities are being accomplished with those profits?  Etc, etc -- It seems like the kind of thing that is easier to say than to do.  I am sure you are busy, but would appreciate your reply - by message, or even by blog post on Kiva.org.  Good luck, and enjoy your time in Mongolia!
        Amy

        _________________________________
        Amber Barger
        Kiva Fellow, Mongolia
        amber.barger@fellows.kiva.org
        Skype: amber.barger

        Kiva | Loans that change lives





--
Ali Carroll Price
Customer Service Manager
Kiva.org - Loans That Change Lives

[iampaul]

Amy, thanks for sharing this.

Paul

[JohnAtKiva]

Hey Amy!  I remember you emailed our customer service team once before with a question about a particular loan:
http://www.kivafriends.org/index.php/topic,321.msg86533.html#msg86533

It's tough, b/c you ask such great questions... but they aren't quite something that I think our Customer Service team is in a position to answer.  Your questions tend to require the expertise of the microfinance partnerships team, but we tend to focus their limited time on the general partner updates that we publish to the partner pages.

We'll have to think about ways we can better tap our partnerships team for these sort of questions!  I'll have to think about that one some more...  if you have any suggestions, would love to hear them!

John

[Amy-in-PHX]

Hey Amy!  I remember you emailed our customer service team once before with a question about a particular loan:
http://www.kivafriends.org/index.php/topic,321.msg86533.html#msg86533

It's tough, b/c you ask such great questions... but they aren't quite something that I think our Customer Service team is in a position to answer.  Your questions tend to require the expertise of the microfinance partnerships team, but we tend to focus their limited time on the general partner updates that we publish to the partner pages.

We'll have to think about ways we can better tap our partnerships team for these sort of questions!  I'll have to think about that one some more...  if you have any suggestions, would love to hear them!

John

Hi, John - The message to which you refer concerned a single loan that went delinquent several months ago - and the message I got back was, in essence, that Kiva only deals with the MFIs and not with individual delinquent loans.  The number of delinquencies has to rise to a high enough percentage to raise a concern about the partner relationship as a whole, before Kiva gets involved.  I understood that.  This latest thing, re Transcapital, is different, because it concerns not a single loan, but the relationship with the MFI as a Field Partner with Kiva.

I have noticed that Customer Service does not seem to have the knowledge to answer specific questions -- which is why I addressed my message to the Kiva Fellow who works on the ground with Transcapital, Amber.  She may know the answers to my questions (or have the ability to find out the answers from the MFI), but it seems she feels she does not have authority from Kiva to respond to a lender email.  I certainly don't blame her for that - I remember what it was like to be the most junior member of a staff. 

If Customer Serivce does not have the knowledge to answer my question, but Kiva's processes require that only Customer Service is allowed to respond to my email, then I don't have any suggestion to make regarding how to improve things.  It's a Catch-22 Kiva has set up.  Unless Kiva wants to permit Customer Service people to ask someone who knows the answers to questions, before they write their responses to emails.

My bottom line here, is that Kiva very clearly tells lenders that we should rely on the statements made on the Field Partner pages in making our decisions to lend.  One of those statements, in the case of Transcaptial, is the one I questioned, about using its profits derived from Kiva loans for "social" programs of some kind.  Frankly, I think Kiva ought to have an idea whether a statement like that is true, or not, before posting the Field Partner page on the site.  If I were Kiva, I would have asked these questions before entering into the partner relationship:  (1) how will you account for the Kiva profits to keep them separate from other profits, and (2) what social programs do you have in mind?  If the statement is true, then Transcapital's accounting people should have set up some way to account separately for "kiva profits" before any loans went live on the Kiva site, and they should be able to tell Kiva how that will be done.  If those questions have been asked and answered, then Kiva could answer my question, if the partnership team kept a record of the answers, which Customer Service people could look up on the computer when they need to respond to a lender inquiry.  (I know that would be tougher to implement than I made it sound.) 

If Kiva just does not think it worth the resources to answer that kind of question, that may be Kiva's bottom line here.  I can live with that - but I will express my views on the high interest and fees charged by this MFI, and the profit margin it derives from using interest-free Kiva money.

EDIT: caught a typo in the last line.

[Peter S]

Amy's questions are good ones.  While we wait to hear from Kiva's partnerships team, I thought it might be worth having a look at Transcapital's available financial statements on mixmarket.org - at http://www.mixmarket.org/mfi/tfs/files - to see what light they might shed.

The 2008 figures are the latest available there.  They show a post-tax profit of 488 million MNT, or around $390,000 USD at today's exchange rate.  The balance sheet shows that all this profit was allocated to their "Social Development Fund", which is the name they give their Retained Earnings.  Total salaries for 2008 were 132 million MNT, or around $105,000, - that's across head office and 10 branch offices, and will include the salary of the CEO, which is not separately disclosed.  $105k strikes me an astonishingly low figure.   There were no dividend payments to shareholders.

Just as a general observation, the fact that they're organised as a for-profit Non Banking Financial Institution doesn't necessarily mean that anyone is getting rich off the backs of the Transcapital borrowers.  If the senior management had decided to dip into the available profit in 2008, their extra salary would have gone to overheads, and the profit margin would have been a lot lower than it was.  Or, the shareholders could have insisted on having the $390k as dividends.

So, paradoxically, a healthy retained profit for a NBFI like Transcapital could be a sign of a tightly-run operation with a firm eye on its social mission - to expand its own outreach for example, bringing financial services to those previously without access.  Minimal or no retained profit in this case might have been a pointer to management that was overpaying itself, or greedy shareholders.

There's a 2008 rating report on Transcapital available from a link at http://www.microfinancegateway.org/p/site/m/template.rc/1.9.30183/   I haven't studied it in great detail, but the shareholders all seem to be private individuals from Mongolia.  It says the majority shareholder is on the Board of Directors of XacBank.


~Peter

edit: corrected a slip that only AccountAbility might have noticed.. 

[Patricia SF]

Here are two things I saw on the FP page:

The institution has received “The Best NBFI Business Excellence Award” from the Mongolian National Chamber of Commerce and Trade from 2004-2009. It also received “The National Best Micro Finance Organization” from the “Grand Expo-2009”, Mongolian Marketing and Management Academy.

Transcapital will direct the net profits, generated from Kiva clients, solely for well-thought out social performance activities to alleviate poverty.

Regarding Transcapital and social performance activities, Kiva Fellow Amber Burger, in Mongolia, talks about this in her blog entry posted today.  Here's an excerpt:

"On Transcapital's Kiva field partner page it says:

"Transcapital will direct the net profits, generated from Kiva clients, solely for well-thought out social performance activities to alleviate poverty.


"Kiva lenders have asked what this statement means, and I wanted to provide a bit more insight. As you know, Transcapital is receiving 0% capital from Kiva. This is allowing them to offer Kiva loans at a reduced interest rate compared to their own microloan product. The additional money that the MFI is saving from Kiva funding is being put into a separate social performance fund.

"I've been working with CEO to audit Transcapital's social performance through the CERISE social performance indicators survey. When the survey results are finalized, Transcapital will use it as a guide for how they can better implement social performance activities. Until the survey results are analyzed and an action plan decided upon, the social performance fund will sit unused. Some of the possibilities include providing financial education, setting up a measurement system to track the poverty levels of clients, or expanding their outreach even farther into the ger districts of Ulaanbaatar. As I write this, just two of Transcapital's Kiva borrowers have fully repaid their loans – it may take some time for the social performance fund to accumulate enough money to be put into action.

"Altanzul Zorigt, Transcapital's CEO, shares his thoughts on social performance:

"During our 4 months of cooperation with Kiva, we are successfully reaching out to more micro business owners and their families, which, in turn, supports Transcapital's Social Performance (SP) objectives. Although, our team believes that there could be more done from Transcapital in regards to SP. We are finishing an SP assessment with the assistance of Kiva and a Kiva Fellow, and we are looking forward to advancing our SP objectives. The end result should translate into serving a larger number of poor people with more appropriate financial and non-financial services that creates real benefit for clients. On behalf of Transcapital, I am thankful for your cooperation to support our local micro entrepreneurs.

"I look forward to seeing which activities Transcapital chooses to invest in as their Kiva portfolio grows. Please stay tuned in the upcoming months to learn more about Transcapital's advancements in the social performance area."