A microfinance draft law is in the making. One of the most important pillars of the new law is to allow private sector companies to provide loans to micro, small and medium-sized enterprises (SMEs). The step will not only provide a most vital economic sector with a wider range of financial services but will also pave the way for a whole new industry. Sherine Nasr interviews , former chairman of Banque Du Caire and now CEO and co-founder of Reefy, the first private sector microfinance lender in the Middle East. The law has not been enacted yet. Under what regulations does Reefy operate now? Reefy is a joint stock company working under the General Authority for Investment and Free Zones. We provide a package of services to the Commercial International Bank (CIB), including marketing, investigation and collection of microfinance lending. In other words, the company's tasks range from soliciting clients, market sizing, paper work, disbursement and collection of loans. But we don't provide loans because we are not yet allowed to do so. The bank does. Once the law is enacted, will you continue to service CIB or would you prefer to start lending? We'd be happy to do both. We have a very successful relation with CIB. We might consider doing it under our own name in circumstances where CIB has no branches or in remote areas where lending services are not available. So far, we have a niche and it is working beautifully. How do you market yourself to your clients? How do you reach them? As a matter of fact, we don't market ourselves at all. We sell loans. This is why we approach our clients selectively. We have trained loan officers to do the job. We scan the market, identify the potential client and we approach them individually. In our business, it is more a sales campaign rather than mass marketing. The name "Reefy" is highly symbolic. Is it indicative of limiting your services to rural areas solely? I have to admit that the majority of our branches are in rural areas and are servicing rural clients. Would you elaborate on Reefy's financial structure and expansion plans? Reefy has been operating for two years now. The paid-in capital was initially LE22.5 million. Shareholders are Naguib Sawiris, the Social Fund for Development (SFD), and myself. There are 515 people working in the company. We have disbursed so far LE250 million to 60,000 clients. We have opened 29 branches, 10 in Cairo, others in Lower and Upper Egypt. We are aiming at 60 branches within the next three to four years. However, going too fast might be risky. So we have decided to slow down, step back and reassess our experience. What role does the SFD play in Reefy? The SFD is the promoter of microfinance in Egypt, and they are in as promoters rather than as regulators. We have not received funding or technical assistance from the SFD or from any other institution. We have not subsidised any of our activities and that's what differentiates us from other NGOs. How do you assess your ability to grow? This is a market-based institution and the only way for this industry to grow is to allow private sector companies to invest based on market norms. The standard for success is the return on our investment. However, investors in this type of business might be more amiable to a lesser return on their investment because they bear in mind the developmental and social dimension this type of business provides for society. The ability of NGOs to grow is tied to the contribution they get, but if you go to the market as a whole, that's where you get the big gains. In what way are you different from banks? We're not. Reefy lends exactly at the same market rate for banks and NGOs, which is 16 per cent. There is no price fixing, but if banks or NGOs started a price war they would all lose. To succeed in microfinance you have to have two things: volume and cost control. Banks are expensive, a bit complex and their organisational structure is over-burdened. That's a fact. This business cannot carry that cost structure. Reefy has 515 employees with monthly salaries less than one tenth of a similar number of employees working in a small bank. In order to succeed in this business we need to have a cost-control mentality. Therefore, our branches are located where no banks will open. Our officers are all young and energetic. This is the way to sustain a microfinance organisation and make a proper return. There are absolutely no frills. How do you cover your losses in case of loan default? We cover loan default from our own capital. Our payment track is 99.2 per cent after two years, and this is quite impressive. Our loan loss reserves are about 2.5 per cent, and that is very acceptable. But we are the most conservative in evaluating our portfolio. If any loan is not paid in 90 days we take full loan loss reserve on it. For NGOs, the period may be extended to 180 days. The only way to find out that something is wrong is not to disburse any loans for sometime. The real risk in this business is not a market risk but internal risk. Most of the failure comes from unethical conduct or gross negligence. As partners, it is our money, and we fervently go after the quality of our portfolio. How do you view the new microfinance draft law? The new law will be very supportive because under current regulations even NGOs don't have the right to lend. So it is excellent to be given that right now. However, we need the law to allow us to do more than just lending. These private sector institutions are basically the bank for the poor. The poor require more than just borrowing. At one time, they will need to be able to transfer their money without having to pay the higher fees of banks. The majority of small loan seekers don't have bank accounts. We will also need to be able to sell them insurance, take deposits, etc. It is a positive sign, though, that we are gradually progressing. It started with lending and maybe it will grow with more understanding that this is about providing financial services to the poor. How do you assess the potential of the industry? The market is large enough and there is great growth potential. Current institutions, including banks, NGOs and private sector companies like ours (there are only two in the market), cover 10 to 15 per cent of market potential. If we assume a penetration rate of 40 per cent of that potential, than you have four to five million potential clients. What I know is that our ability to grow today is negatively affected by my ability to hire the right people. Egyptians in general tend to like deskwork not field work. Nevertheless, I am very happy that Egypt is moving in the right direction. The new law will give us more freedom to operate.
