A microloan lifeline

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					                                     Publication: TODAY Online
                                     Date: 12 February 2012
                                     Headline: A microloan lifeline




A microloan lifeline
It's a ground-breaking pilot project to help low-income Singaporeans - who would
not normally qualify for bank loans - be entrepreneurs and self-reliant. Three months
on, how is it doing?




by Cheow Xin Yi
Updated 11:20 AM Feb 12, 2012




Mr Simon Ng Poh Heng with his van and stock of canvas shoes. Photo by Don Wong

One proposed borrowing funds to open a social escort agency. Others wanted business
loans of S$50,000 to be repaid over 10 years.

Since the pilot MicroCredit Business Scheme (MCBS) was launched in November to help
low-income Sinagaporeans stand on their own feet by starting or expanding their mini-
businesses, there have been some quality submissions by applicants with genuine needs -
as well as "frivolous" ones from those "just trying their luck", says Mr Kuo How Nam.

It is the pioneer initiative of its kind here. No wonder that for its collaborators - POSB, the
Social Enterprise Hub and Tote Board - getting it going has been an experimental lesson,
too.

The concept of microloans is most famously associated with Muhammad Yunus and his
Grameen Bank, whose model of providing small business loans to the rural poor in
Bangladesh was honoured with the 2006 Nobel Peace Prize.

In Singapore, the idea of a "banker to the poor" within an urban context was floating within
"government circles" as early as 2009, according to Mr Kuo, who heads the programme
office of the MCBS.



RECESSION AND UNCERTAINTY

Talk gained momentum the next year as the effects of recession hit Singaporeans hard. "At
that point, there was unemployment ... and a lot of remarks that middle-aged people
                                   Publication: TODAY Online
                                   Date: 12 February 2012
                                   Headline: A microloan lifeline




couldn't find jobs. There was a feeling, would a microcredit scheme be useful in providing
low- to no-income families the means to start their own business?

"But the key question was - would there be sufficient volume for the scheme to be viable,
and if so, what form should it take? So, there was quite a bit of uncertainty," said Mr Kuo, a
former banker whose career has spanned over 30 years and current president of Credit
Counselling Singapore.

Inhibiting factors included high costs, existing financial regulations and most Singaporeans'
general preference to be salaried workers rather than entrepreneurs.

"This was discussed and finally, towards the end of 2009, it was decided that we should
proceed with a trial project on the basis that if we go on talking and never try, we would
never know," he said.



FILLING A LOW-INCOME GAP

Approached by former colleague and Tote Board chief executive Tan Soo Nan, Mr Kuo,
together with a working committee, mulled over the nuts and bolts of what he stressed was
very much a pilot scheme. The Tote Board provided the seed funding of S$5 million.

POSB was roped in to administer the loans, providing support on loan structuring,
disbursements and repayment. The MCBS programme office helmed by Mr Kuo manages
the scheme, including making loan evaluations and offering support services to applicants
and borrowers.

Various voluntary welfare organisations were called upon to help disseminate information
about the scheme, which began to finally take shape.

Its great value is that citizens earning less than S$30,000 a year who were previously
unable to get a loan through other mainstream channels, can now obtain unsecured loans
of S$5,000 to S$50,000, for their micro-businesses.



'THIS IS NOT AN ANGEL FUND'

The scheme drew more than 90 applications in its first two months; applicants must submit
a business plan as part of the process. While Mr Kuo was "pleasantly surprised" by a
response he described as "overwhelming", he cautioned that there are many
misconceptions about the scheme.

Speaking to Today at his CCS office in Maxwell House, Mr Kuo said: "What I want you to
publish in your paper is a quote from me to say, 'Look, this scheme is not a grant, it is not
an entitlement. We are not a private equity fund. We are not an angel fund, neither are we
a venture capitalist. This is a commercial loan and it is expected to be repaid.'
                                    Publication: TODAY Online
                                    Date: 12 February 2012
                                    Headline: A microloan lifeline




"A lot of people come in with expectations that they are entitled to a loan no matter how
vague or weak the business proposal is. The scheme doesn't work that way ... Of course
the purpose is to increase people's income, but the last thing we want to do is to make
them poorer if the business fails."

Mr Kuo revealed that his office rejected about half of the applications on the spot (including
the proposal for a social escort agency, which he called "out-of-scope"). "From just looking
at the forms, it's very obvious that those were not serious applications. The applicants can't
articulate what they want and they give you very little information. They don't know what the
project costs, and very often, have no experience in the proposed area of business."



TAKING GREATER RISKS

While the MCBS adopts principles that are similar to commercial banking in evaluating
loans, Mr Kuo said the scheme takes greater risks as it does not require collateral.

"A commercial bank might say, 'Okay, this project is sound but they don't have security.'
For us, security is not the primary consideration. That would be 'is this going to be a viable
project? Has the person done his background checks and his sums? Does he know what
he's doing?' Then we assess whether the project has a reasonable chance of being viable."

His team of loan officers interview the applicants who aren't cut at the outset. In fact, Mr
Kuo said he makes it a point himself to meet these applicants face-to-face. "It makes it
easier for you to understand the project and assess whether the person has the drive and
experience to make it a success."

He acknowledged the tightrope his team has to walk: Having to balance the optimal level of
risk against the objective of helping the low-income. "If we are too strict, we can end up with
very safe loans. If we are liberal, we might end up with a lot of bad debts."

"The scheme has got to be sustainable. It must help enough people, but at the same time,
they must pay you back," he added.

Even so, Mr Kuo has been "pleasantly surprised" by the quality of some of the business
proposals so far. "These are people from the bottom economic rung, yet you can see that
they are energetic, enterprising, optimistic. Also realistic about what they expect out of life.
They don't aim for the sky but set realistic goals."



WHAT IF THEY FAIL?

While it's too early yet to judge the pilot scheme's impact, Singapore Management
University professor of finance Benedict Koh ventures that the interest rates - from 8 to 12
per cent a year - could be too high to fulfil its social objective effectively.
                                   Publication: TODAY Online
                                   Date: 12 February 2012
                                   Headline: A microloan lifeline




"Typically, long-term returns on corporate bonds are about 5 to 6 per cent. They can say
these people have high risks, but ... if the scheme is going to help those who are not
desperately poor but lack money to start a business, charging them this kind of rate is not
going to help them." He thinks a breakeven rate - which typically covers administration
costs and allowance for potential bad debts - of about 5 to 6 per cent is more realistic.

Prof Koh also suggested that bad debts be written off for "genuine failure" cases (such as
because of defaulting suppliers). In microcredit schemes elsewhere, rural borrowers have
been locked into a cycle of debt when, for instance, crops are destroyed by natural disaster.

While POSB managing director Koh Kar Siong stressed that profitability is last on the minds
of those behind the scheme, he noted the need for a sense of ownership on the part of
borrowers. "We also do not want to set the interest rates too low such that there is no
discipline and commitment to repay." The rates will be reviewed as the scheme runs its
course, he added.

Mr Kuo pointed out that the scheme comes with very high administrative costs, given the
resources put into evaluating very small loans. "It's a very thorough process which takes up
manpower and time, and you also have to take into account the bad debt write-off rate,
which can be expected to be high because it's unsecured."

He added: "People must take responsibility for ensuring that they go into this with their eyes
open - knowing that they will have to pay when the project goes bust."

But borrowers can be assured that if their business runs into rough waters, help will be
forthcoming. POSB's Mr Koh spoke of "handholding" by officers who will help to
troubleshoot problems - which could be location issues ("we can relocate the business") or
high cost of goods ("perhaps we can help link to another big group of buyers and get a bulk
discount").

As a matter of course, successful loan applications get free training on the basics of
business financial management, and the chance to network with other borrowers. "While
we provide them with this (loan) lifeline, we also teach them how to survive. It's not just we
simply give them the loan and hope to earn back the interest," said Mr Koh.


MOTHER OF FIVE WANTED TO STAND ON HER OWN FEET

Wishing to be financially independent after the end of her marriage, housewife Zaharah
Khalid applied for a licence to operate a canteen stall at a school near her house, and got it.
But that was only half the battle for self-reliance won.

"I went for the food testing and got the licence in December, and I needed to start
operations in January. But to set up the stall was not easy; we needed at least S$3,000 to
S$5,000. I didn’t have that kind of money," said the 44-year-old mother of five.

Then, a social welfare officer at the Daybreak Family Service Centre introduced her to the
                                   Publication: TODAY Online
                                   Date: 12 February 2012
                                   Headline: A microloan lifeline




MicroCredit Business Scheme in mid-December. It took just "plus or minus, 10 days" for
her loan application to be approved.
"The process was quite fast. They say it usually takes about one month, but Mr Kuo (How
Nam) and (another loan officer) came to my house and he said, ‘Okay, help her complete
the process as soon as possible,’ because I told him I really wanted to have this stall," said
Madam Zaharah.

A housewife for more than 20 years, she had some experience in the area, having helped
out at her mother’s canteen stall at an Institute of Technical Education. They closed the
stall after the school relocated, but Mdm Zaharah harboured hopes of having her own stall
one day. "I wanted to be independent and work, so if anything happened, I could support
my children."

While her two older children are self sufficient — her eldest daughter, 24, is a kindergarten
teacher and her second son, 20, is working part-time for his polytechnic education — she
still has to take care of three boys aged 10, eight and five.

Armed with the licence, a S$5,000 loan and the help of a friend, she furnished the empty
canteen stall with cabinets, utensils, a stainless steel stove, oven and sinks. She serves
mee rebus and mee soto and, including the catering that she does for school functions, the
stall makes a daily average of S$250 after costs — more than enough to cover the S$160
monthly repayment on her loan.


HE HAD TO PAWN HIS WEDDING RING TO BUY STOCK

Mr Simon Ng Poh Heng used to work as a shoe salesman. When his Chinese boss folded
the business, Mr Ng decided to strike out on his own — setting up a shoe distribution
business, Hwa Feng Footwear, which he has been running for the past two years.

"At my age, it is harder to find a job, and I don’t have much education," reasoned the 51-
year-old in Mandarin.

He looks up designs of canvas shoes online, then contacts the shoe suppliers in China
directly. He imports the footwear from Guangzhou and sells them to heartland stores here.
"Lots of elderly folk buy the shoes," he says; demand is booming and he has more than
100 customers "in every corner of Singapore".

What was holding back his business: The lack of working capital. Some customers owed
him up to two months’ payment. And while he gets calls from banks asking if he wants a
credit line, "I’m always not eligible because I don’t earn enough". Last year, Mr Ng even
had to pawn his wedding ring to buy stock from China.

He was preparing to wrap up his business when he read about the MicroCredit Business
Scheme in the newspapers. He picked up an application form on the scheme’s very first
day and sent it in.

His loan was approved in late December and, while he said that he only received the
                                  Publication: TODAY Online
                                  Date: 12 February 2012
                                  Headline: A microloan lifeline




S$7,000 earlier this month, hence missing out on the Chinese New Year festive sales
period, Mr Ng said the money is still a precious lifeline. Where he used to have only
S$1,000 to spend on stocking up each time, he can now buy S$5,000 worth of shoes at
one go, which means more variety and a potential bulk discount. (There are also import
duties and expenses of his occasional sourcing trips to China to pay for.)

He is confident his earnings can increase by at least 50 per cent. He currently supports a
wife and two sons, aged six months and 20 months, on just over S$1,000 a month.
"S$7,000 is still a small amount, but if you know how to make use of it, money will breed
money," he said."And it helps that I’m very frugal. I eat all meals at home. My wife makes
her own noodles from flour."

				
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