From charity to business
Friday, November 4, 2005
(The following appeared in the full article “From Charity to Business”)
A credit to the industry
ProCredit came to banking by an indirect route. Its founder, C.P. Zeitinger, began his career in the 1970s by examining Latin American financial institutions that were getting money from German development agencies. When he pointed out that the whole thing was a waste of money, he was, in effect, fired by the agencies . After working on the conversion of various not-for-profit institutions into banks in the 1990s, as ACCION had done, Mr Zeitinger became convinced that it would be cheaper and faster to start financial institutions afresh. Backed by investment from various development agencies such as the World Bank’s International Finance Corporation, he started out in Bosnia and Hercegovina in 1996 and has since founded banks in 14 other countries and taken a controlling position in four others.
The most recent addition came this month in Congo, which speaks volumes about what ProCredit considers an opportunity. There is vast potential (60m people and only 50 bank branches), coupled with many evident risks (decades of intermittent war; nearby genocide; no local currency; frequent famine; sporadic government coups). Into this chaos, ProCredit introduces a consistent model (with minor local adjustments) that relies on the company having full control: ?We are not polite, we know what we want, we have it our way,? explains Mr Zeitinger.
The back-office systems of ProCredit banks and its branding are identical around the world, and supervised by some of the same people. Their credit systems depend on careful analysis of the cashflow and business prospects of every client, and even competitors concede that they are unusually good at detecting problems before loans are granted. ProCredit does not do group lending, partly because Mr Zeitinger thinks it only really works in rural settings where people are genuinely close, and partly because he feels that individuals should not have to be responsible for the failures of others but should be judged on their own merits. ProCredit also expects clients to come to its branches to repay loans, rather than sending out collection agents to villages, as many other microfinance institutions do.
ProCredit’s experience shows that there is a pent-up demand for credit and saving in even the poorest corners of the world, and that poor people will seek out institutions that provide these things effectively. Its growth has been remarkable. It now has 7,500 employees, of whom 2,500 were hired in the past year. With $2 billion in assets, it remains tiny by multinational banking standards, but it is not insubstantial. Fitch, a leading rating agency, recently gave it an investment-grade rating, noting that it had operated successfully in some extremely difficult environments. Even in Haiti, where it has lost money in euro terms because of a 30% currency devaluation, it continues to operate profitably in local money. ?Any anarchy is frightening,? says Mr Zeitinger. ?But it is an opportunity as well, because it allows you to impose your own structure and grow faster and become more important and become more profitable.?
ProCredit has not yet left the not-for-profit world entirely. When it moves into a new country, it often accepts subsidies for the first two or three years, a time of high start-up costs and little revenue. But its good performance is now opening up other sources of funds: it recently raised $54m in the German bond market with the help of Deutsche Bank at an interest rate of just over 5%. Its banks in three countries have been able to raise money via local bank syndicates. It has also seen a huge growth in deposits.
In the not-too-distant future, Mr Zeitinger foresees ProCredit becoming entirely independent of international financial organisations. In some poor countries, he hopes to be able to borrow and lend at rates below those for the government’s own debt (which in well-run countries is usually the best-quality credit), reflecting his clients’ and his firm’s superior record of repayment. That would demonstrate the virtues of normal banking. But what do the mainstream banks themselves make of microfinance?