Micro-Shop Construction Financing for SMEs through Group Lending

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Micro-Shop Construction Financing for SMEs through Group Lending

Papua New Guinea
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

The solution is Micro-shop construction Financing for SMEs through Group Lending. The solution addresses the acute shortage of micro housing finance for the SMEs in Papua New Guinea. It frees and directs their working capital to more productive business activities and provides the initial support to the SMEs in the country.

About Project

Solution: What is the proposed solution? Please be specific!

There is acute shortage of micro shop financing in Papua New Guinea. In the recent past there has been expansion of SME sector in the urban centers like Port Moresby but not so much in other centers and in the rural towns and the Districts. However even this activity is confined to the high-end, more lucrative, segment of the market, which is beyond the reach of people working in the informal sector. The competition is very limited, thus people have very little choice in terms of the cost and type of shops and locations that they prefer to live in. People are being forced to erect temporary structures in the squatter settlements on the fringes of the towns. While these structures are inadequate, they have been the only locations for people to pursue their business activities, in the absence of alternatives. Our innovation addresses the rural and semi urban entrepreneurs and would offer working capital finance to small and medium shopkeepers in the region for the purpose of Micro shop construction. The financing would free its working capital cash flow and would direct it to more productive business areas. The clients of PNG Microfinance Ltd (PML) particularly those from informal sector, have currently has no access to micro shop finance. PML will pay more attention to repayment capacity and tenure security, and would also obtain a mortgage as the clients are able to provide them. The financing would be provided in the group lending model (Variant of Grameen Model) and would comprise 20 members in one locality. All the members will be jointly liable to the loan and would support each other in repayment in case of any urgency. Thus provision of Micro shop finance by PML will meet an important customer need which is still unexplored and is a business opportunity in Papua New Guinea.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

PNG with a population of 6.5 Million has its 85% population residing in rural areas. It already has depositors base of 63,677 and borrower base of more than 2,500. It envisages a client base of around 14,000 in three years time through the proposed initiative in the most rural and backward areas of PNG.
About You
Organization:
PML Microfinance Ltd.
About You
First Name

sudhanshu

Last Name

shekhar

Website
Your Organization

PML Microfinance Ltd.

Country

, MR

About Your Organization
Organization Name

PML Microfinance Ltd.

Organization Phone

+675 321 2111

Organization Address

Musgrave Street Level 2, ADF Haus Port Moresby NCD Papua New Guinea

Organization Country

, MR

Organization Type

Private Institution

Your solution
Country your work focuses on

, MR

If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Range of turnover in your target firms, in USD

$1-5 Million.

Average turnover in USD of your target firm

2

Number of employees in your target firms

100-150.

Average number of employees of your target firm

125

Specify the size, average and range of expected loans or investments in each target firm

The product will be piloted at Koki and Kimbe. The target for Pilot is USD 38,000 with at least 20 members in a group with average loan size of USD 1,900. The pilot will run from 1st November to 31st January 2010.

What stage is your solution in?

Idea phase

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

The proposed innovation will seek public intervention in forming the desired financial and operational infrastructure for the financial services. Established in 2004, PNG Microfinance Ltd (PML) is a limited liability company. PNG Microfinance Limited (PML) is Papua New Guinea’s (PNG) first commercial microfinance institution. PML currently has 9 branches, and a range of products offered including six savings products and six loan products. Currently PML has 63,677 depositors and 2,507 borrowers as of 30 June 2010. It presently serves USD 3.3 Million and has a deposit of USD 13.6 Million.

PML will leverage public intervention by using the huge branch networking and existing infrastructure. The trust and confidence built in its clientele through the six years of quality service will be instrumental in drawing the required public support mobilization. Again, with approximately 85 per cent of people live in rural areas and dependent on agriculture as major source of income. Other sources are including wage employment, small business, remittances and royalties. Most rural people are semi-subsistence farmers who produce food and cash crops from their own gardens. A dominant staple crop occupies at least one third of the garden area. This leaves huge scope for enterprise development in the country and would attract the public intervention in this innovative proposal of PML.

What barriers does your proposed solution address?

Lack of financial capacity.

If you checked any of these barriers, describe how your solution addresses them

PML currently maintains deposit of USD 13.6 Million and has a loan outstanding of USD 3.3 Million. However the requirement of USD 25 Million will be funded by the support from the commercial banks like ANZ, Westpac and BSP along with the existing ongoing IFC support to PML. The high recoverability of the proposed loan products, along with one of the lowest existing loan portfolio at risk augurs well for the organization in terms of mobilizing the funds.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

While PML has a depositor base of 63,777, and deposit of USD 13.6 Million, it serves a loan outstanding of USD 3.3 Million to 2,507 clients in Papua New Guinea. The huge existing infrastructure will ensure the smooth implementation of the proposed initiative and the potential impact will be a loan outstanding of USD 25 Million in three years and will serve a clientele base of 13,889 clients during this period.

How many firms do you expect to reach?

PML would attract debt and equity funding partners to implement the initiative in PNG and would seek partnerships with financial institutions in PNG for the funding support.

What is the volume of private SME finance you aim to catalyze?

The volume of private SME finance will be to the tune of USD 25 Million and it will serve to the SME clientele base of 13,889. The existing infrastructure will provide the required base for providing the Micro-shop financing services to the mentioned clientele base.

What time frame will be required to reach these targets?

PML envisages to start its micro-shop financing operations from November 2010 onwards and will reach the target clientele base of 13,889 and a loan portfolio of USD 13.6 Million in three years. It will serve its clientele with the help of nine existing branches across Papua New Guinea.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

The proposed project faces only one constraint of financing the project for three years. The debt support to create the loan portfolio of USD 25 Million in three years will require the on-lending support to approx. 19,000 clients. PML with its USD 13.6 Million deposits faces problems in mobilizing the short term, low cost financing option to meet the requirement of the projects and would seek partnerships from the financial institutions and funding organizations like IFC and Ausaid.

Sustainability
List all the funding sources that are required for the sustainability of this solution

PML would attract debt and equity funding partners to implement the initiative in PNG and would seek partnerships with financial institutions in PNG for the funding support. The debt support to develop the loan portfolio of USD 25 Million in three years will require the on-lending funds support for approx. 19,000 clients. PML with its USD 13.6 Million deposits still finds it difficult in mobilizing the short term, low cost funds to meet the financial requirement of the project and would seek partnerships from the financial institutions and funding organizations like IFC and Ausaid. The ongoing support from BASIX India’s technical support and IFC support will form base for further developing the funding strategy of PML for this particular proposed project.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The targets for the proposed solution have been drawn as follow
i. 695 groups of 20 members each which effectively mean 13,889 clients
ii. At USD 1,800 loan size for each client, the overall loan disbursed will be 25 Million for three years time period.
The capacity to graduate from dependence on public finance for PML is huge due to these factors
i. Existing experience to handle large size financial services (Credit, Savings): PML already has staff with the knowledge of land titles, deeds etc. Their knowledge can be leveraged to successfully handle the product. PML can also leverage the expertise of staff built over the years for making assessment of income of the clients. Currently SME loans form volume USD 1.7 Million and 56% of the loan portfolio. Majority of the loans have been made to PMV or trade stores. Housing loans could potentially lead to a diversified portfolio.

ii. Assuming the 75% of cumulative disbursement as loan portfolio outstanding stands at USD 18.75 Million with 5% Portfolio at Risk and at 20% flat+ 1% processing fees, the project will be very sustainable after the proposed third year.

Eligible borrowers All, preference will be given to Those on the 3rd loan cycle with PML, Oil Palm farmers, including Staff ( minimum 2 years service & with good performance)
Nativity 5 years
Facility Term loan
Tenure minimum of 1 year and maximum of 5 years
Funding caps Min: USD 3,800
Max: USD 38,000
Funding eligibility 80% of the cost of the home, or estimated cost of construction
Loan eligibility Installment should not exceed 50% of the assessed monthly
income
Equity 20% of the loan amount as cash equity deposited with PML
Collateral Security cover 1. One Guarantor with Net worth equal to Loan amount.
and
2. Property: 125%
Or
Cash Collateral (inclusive of interest): 100%

Interest 20% flat per annum
Processing fees 1% of the loan amount
Documents to be submitted for Processing of loans 1. Application form
2. 3 recent Pay slips or Financial statements
3.Copy of state lease title or Transfer Instrument
4. Valuation report
5.Copy of Insurance or Insurance quotation
6.Discharge of Mortgage
7.Land Rental receipts
8.Building Plan
9. Building board approval.
10.Contract for Sale
11.Title search for existing house

Both the points suggest a well grounded and sustainable finance model to free herself from any dependence on public finance in three years time.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

Strong Risk containment measures that PML will take to contain any inherent risks involved in the operations are as below:

Site visit and personal discussion Mandatory. to be done by Branch manager
Character references 2 references mandatory

Valuation of security PML choice of agent will be used for Property valuation
Primary security Mortgage of the house
Documents to be obtained after approval of loan Title deeds search report
Demand promissory note
Mortgage title (original)
Personal guarantee
Registration of Mortgage
Photograph of the property together with the applicant
Copy of settlement statement

The current membership of PML is already more than 65,000 which suggest a well grounded and successful operations running in PNG.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

The success of the project would depend on forming partnerships with two types of organizations.
1. Technical Assistance Consulting Agency: BASIX Consulting and Training Services presently provides its consulting services to PML on a long term basis and would continue as partner agency for the technical assistance on the propose project. BASIX Consulting (part of the BASIX Group of companies) offers technical assistance to MFIs and Livelihood Promoting Organizations in India and abroad for the past 14 years.
2. Financial Partners: The investing partners in equity and debt will provide the required strategic guidance and would represent in the Board to drive the initiative with more accountability and bring more transparency in the governance. The debt funds are required as on-lending fund to support “as-on when required” basis to limit the cost and also free the burden of overloading the responsibility to disburse to the clients. The partnership would seek their expertise in bringing the bridge loans and bring fresh ideas on risk management.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

While BASIX Consulting is hired to train the field staff and the middle management to provide the required HR strength to the organization, it still remains a challenge for the organization to get the educated and qualified staff for the organization at all level. It would require more training and consequently more engagement with specialized consulting agency like BASIX Consulting.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

In the micro shop construction segment, the competition is very limited, thus people have very little choice in terms of the cost and type of shops and locations that they prefer to live in. People are being forced to erect temporary structures in the squatter settlements on the fringes of the towns. While these structures are inadequate, they have been the only locations for people to pursue their business activities, in the absence of alternatives. The proposed solution will target approx 19,000 clients in different geographies representing different segments of the society. The initiative will bring in the required entrepreneurship in the country and will drive the SME sector at a high growth trajectory. The successful model is replicable and will be taken further to other Pacific Island countries such as Samoa Islands, Soloman Islands, Vanuatu, New Caledonia, Timor Leste and others.

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