CHAPTER 1
Insight: Don't just offer products; respond to client needs
Five years ago, I was heavily pregnant with my second child. The sun had not yet risen when I realized that I was bleeding heavily. I remember how my heart sank when the village midwife told me that I needed to go to the provincial hospital for an emergency caesarean section. Welcoming a baby into this world is supposed to be a happy event, but without the $50 I needed for the operation, I feared for the worst. I knew they wouldn't even let me enter the hospital, let alone see a doctor. What could I do? As the contractions became more regular, all I could hear was the midwife's warning in my mind: 'You'll lose your baby, and your little girl might lose her mother too.' My family couldn't help me with the money but fortunately the neighbour, who had heard the commotion, came to the door. She was the president of our village bank, and reminded me that I could get an emergency loan from AMK. I had been in the group for more than six months, so I could apply. She lent me her phone, and even dialled the numbers because my hands were shaking so much. When I talked to the client officer, I couldn't believe what he was saying to me. I could have the loan. I didn't need to travel to the branch, I didn't even need to fill out any papers. He just said: 'Go to the hospital now. I'll meet you there with the money. The paperwork can wait.' And so I did. I still remember that somehow, that day, the distance between my village and the hospital in town had doubled – every bump on that long road caused me pain. I was in agony – but I was also full of hope and amazement at what had just happened. I wasn't going to lose my baby after all. It seemed like a dream. But sure enough, an hour later, I met the client officer on the steps of the hospital. He told me that he had already paid the money, and that they were waiting for me inside. And do you know? The client officer came back the next day, to visit me and my beautiful new son. He was as proud as any uncle – and his eyes just shone when I told him that I decided to name my son 'AMK'.
Samnang (AMK client)
Here we have a story of a microfinance client in a desperate situation, and an organization that supported her when she needed it most, at precisely the right time and in the right way. From a client perspective, the emergency loan is a great product. Loans of up to the equivalent of $100 (with a 10-month term) are disbursed within four hours of being requested, and often the client officer will deliver the money to wherever the client happens to be at the time. The paperwork is handled at a later date, only one guarantor is needed (and this too is sorted out afterwards), and during the loan term only interest repayments apply (charged at a lower rate than AMK's other products). What we also find notable about this story is the business value that the emergency loan represents: introduced in 2005, it is a product that was then (and still is) unique to AMK, and which enables AMK to clearly distinguish itself in a crowded marketplace. From an institutional perspective, the emergency loan is potentially risky, at least on paper. AMK lets funds go out the door quickly, with no up-front checks, for less profit, and with fewer guarantees than it requires for its other products. On the other hand, AMK defines 'emergency' quite narrowly (health or family funeral expenses), which acts to limit its portfolio exposure. In fact, AMK's experience is that although this product accounts for less than 1 per cent of its books, clients consistently cite it as a cause for satisfaction with AMK's work. That is, even if they don't use it very often, clients feel secure knowing it's available when they need it.
However, the most interesting part of the story isn't the loan itself, or even the benefit to the client. Of most interest is what came before Samnang's tale even began: the steps that led AMK to understand the challenges faced by its clients, and to design an appropriate response. So how did it do it? It began by throwing out its assumptions about clients and, instead, sought to find out who its clients were, what was really happening in their lives, and what it was they really needed to improve their lives.
This might sound like a radical (and complex) approach, but there's a real history to AMK's 'no assumptions' mindset. This history was described poignantly as we talked with Theresa McDonnell Friström, the Concern Cambodia Country Director between 2002 and 2005 (and former chair of AMK's Board):
What became clear to me was that despite trying to help our clients, we didn't really understand their needs and living conditions. I recall the day that the finance manager walked into my office with bad news. After two years of devastating floods, bad debts in one branch were double what we had anticipated them to be – totalling $75,000. My immediate instinct was to write off the bad loans. I felt if countries can write off debt, why can't we do the same for poor people who are vulnerable to natural disaster? My idea, however, met with unexpected resistance. Management staff convinced me that we should visit the villages and get a sense of what was really happening with clients. The results, I must say, really shocked me. In only three villages were clients genuinely unable to repay; clients in the other six villages were able but merely unwilling, and using the flood as an excuse not to repay. Could we really afford to not understand our clients' lives? No sooner was this behind us than we found instances of staff fraud. To achieve their poverty targets, client officers were creating 'ghost clients', using the names of the poorest households on the loan applications – but then taking the loans for their own use and putting clients under pressure to repay loans that they never received. How is it that we were hurting the very people we were trying to help? I believed, and still do, that people should not be worse off as a result of our development initiatives. For this to happen, it's clear that our work needs to be rooted in a deep understanding of clients' needs, and we need to recognize the potential of quite serious harm we could cause clients as a result of poorly designed and managed systems.
In light of these experiences, one of the critical lessons from the Concern Programme (which resonated with many members of the new AMK Board) was that making assumptions was to be avoided at all costs. The new organization needed to invest in understanding its clients' lives and livelihoods, and translate this understanding into meaningful strategic and operational decisions around what to offer, and how. Having decided to take nothing about its clients for granted, AMK took the (comparatively unusual) decision to invest heavily in an in-house research department from the outset. Indeed, the research manager was the first new hire – appointed even before the first CEO was in place. Research in those early days was focused around finding out what AMK already knew about its clients, and fleshing out that picture through sample-based investigation (and feedback from field staff) to build up a picture of the characteristics and needs of different client groups. This covered everything from household composition and construction to food intake, income sources, levels of assets and debt, and expenditure patterns.
Understanding client livelihoods
So who were AMK's clients, precisely? In 2003, the majority of people AMK served (most of whom were women) were involved in rural agriculture – specifically rain-fed rice production. Rice is the centrepiece of the Cambodian economic landscape and diet, with rice production accounting for 84 per cent of cultivated land. It dominates agricultural labour and output, as well as the Cambodian diet, accounting for 68 per cent of the daily caloric intake of the average Cambodian adult. The national importance of this foodstuff is woven into the very fabric of Cambodia's language; the Khmer for 'to eat' translates literally as 'eat rice' (pisa bei). Rice production is labour-intensive work, requiring considerable attention to precise paddy preparation, water-level management, delicate weeding and constant pest control to produce a successful harvest. Wet-rice labour inputs are concentrated in the nine-month rainy season between May and January, with peaks of intensity occurring in May (for land preparation), June–July (for transplanting seedlings), and November–December (for harvesting).
AMK understood, however, that it needed to move beyond a superficial scan of 'what our clients do to earn a living', and get to grips with the financial realities of those livelihoods: the extent (or lack) of diversity in terms of household income sources; what levels of income clients generally expect to see; the nature of how this income fluctuates over the course of the typical year; and when cash-flow 'crunch points' emerge (whether these be from coping with health emergencies or disaster, or from more predictable life-cycle events such as weddings or festivals). Crucially, AMK also sought to understand how the livelihoods and vulnerabilities of various client groups differed – for example, clients involved in agricultural production as opposed to those involved in small trading or labouring work.
AMK's initial research findings turned the common perception of rural clients neatly on its head: namely that clients weren't singularly dependent on agricultural income to survive. They clearly had mixed economic baskets: while nearly all rural households (99 per cent) engaged in at least one traditional 'farm' activity (which accounted for about one third of household income), 96 per cent of clients also counted on non-farm work (such as tailoring or carpentry) to provide income. Moreover, 79 per cent had other income streams – often from children working in the burgeoning garment factories, which by 2003 contributed 15 per cent of GDP, as well as from those working in construction, which accounted for 6 per cent of GDP (as illustrated by Chandararot and Ballard's 2004 Cambodia Annual Economic review). Looking at the seasonality and volatility of cash-flow patterns generated another interesting finding. When AMK asked clients to name the months when they most needed to borrow, there was a clear concentration of answers in the period from May to September, coinciding with the paddy preparation and seedling transplanting phases (rather than the post-harvest period of January to April, as AMK might have assumed). Interrogating household consumption patterns revealed that clients need access to funds throughout the year, not just during the planting season. This includes paying for religious ceremonies, building enterprise and household assets, school fees and health expenses. Where poor people don't have cash to hand when they need to invest or cover expenses, then (in the absence of access to credit), they are forced to sell assets or curtail their food consumption.
Designing products that respond to needs
MK's research helped it build up a picture of its clients' livelihoods – which are varied, uncertain, and vulnerable to shocks (such as crop failure or emergencies). It brought this knowledge to bear in designing products and services aimed at helping clients harness economic opportunities and avoid the pitfalls associated with debt. In practice, this entailed a decisive move away from the typical standardized approach and towards a product design that gives clients access to the right amount of credit when they think they need it; for the right length of time, in line with their livelihood; and which builds in time for them to recover from unexpected shocks, such as crop failure, before the loan falls due. AMK also helps clients manage risk by providing other financial services (such as savings and insurance), and building flexibility into its products. As we'll learn, some of the choices it made were quite radical, not just within the Cambodian microfinance market but compared to what was then considered international best practice.
Enabling clients to take good decisions
When we say that AMK is 'risk-aware', we don't mean that it simply manages risk on behalf of its clients. Yes, it does all it can upfront to protect and support clients, but it also gives them the space they need to manage their own risk. For example, soon after AMK's registration (as a separate entity rather than a programme run by the charity Concern), its Management took the interesting decision to drop the loan utilization checks that were part of Concern's methodology. Why so? Let's revisit some basics here. Microfinance investment loans aim to help clients improve their economic situation (in the long term) through engaging in more (or more effective) income-generating activities (in the short term). Ideally, this means that clients will invest their loans in their enterprise – whether this is in the form of agriculture, trading or production. Within this framework (or so the theory goes), using microloans for consumption purposes (for example, buying a cooking stove for the household, or food for the family) creates a drag effect on clients' potential return on investment. When this happens, clients miss out on the opportunity to optimize their income, which in turn can hinder their capacity to repay their loan with interest (which is problematic for both client and lender). From this perspective, checking whether clients are actually using the loan to invest in their business is important.
AMK's take on this situation differs somewhat. There exists a line of argument that clients themselves are best placed to plan and execute decisions about how to use their money. For example, using a portion of an enterprise loan to buy a cooking stove for the home is, from the lender's perspective, a textbook case of diverting a business loan for consumption. But let's consider carefully the role of the cooking stove in the life of the client: if it is a labour-saving (therefore time-saving) device, does it not free up the client to devote more attention to business activities? And what if the client uses part of a business loan to buy medicine for a serious, unexpected illness? Essentially, here we have a client using available money to solve a health problem; an investment which potentially stands to generate higher returns than buying stock that she is unable to sell because she is unwell.
Loan utilization, therefore, is a data point that is monitored, but not supervised. AMK's Management knows that approximately 30 per cent of loan capital is used for consumption purposes, and it is comfortable with this level given its stability over time. (Were Management to see an increasing trend in the future, this would prompt further research and a conversation about the most appropriate response.) To some, 30 per cent might seem like a high rate of 'loan leak', but for AMK, it is simply a recognition that clients' financial needs are frequent and varied, and is built into the assumptions about affordability in the loan application process. AMK's point is this: when such needs arise (and when access to formal credit is lacking), clients will either curtail consumption, or borrow from informal sources (and at higher interest rates, if the loan is from the local money-lender) to cover them. From AMK's perspective, neither of these options is good enough.
Helping clients meet their investment needs
So, we've learned about how AMK creates flexibility to allow clients to use a portion of their loans for non-investment purposes. But what about making good business investments? Without a detailed picture of the realities of clients' lives, the obvious choice (from a product design perspective) might simply be to go into rural areas and offer a typical group loan. By the time AMK started up, most microfinance organizations in Cambodia had moved beyond the common international practice of issuing loans paid in weekly or monthly instalments. These loans can work for clients with an enterprise that generates regular turnover, but those clients investing in agriculture need a lump-sum input at one certain time of the year, which can be repaid (also in a lump sum) using income generated by the harvest later in the year. AMK inherited a group loan product from Concern that featured end-of-term repayment of principal (with interest paid monthly). So far, so good. But as we've discussed, AMK's research highlighted that clients had income streams other than agriculture. This did not mean, however, that they were able to cope with regular instalments; their income sources might have been varied, but they were also volatile. When AMK added all this up, it realized that simply basing repayment schedules on the agricultural season did not allow clients the flexibility to access loans and to repay them when they were most able to; complete financial flexibility was key. For this reason, AMK changed the loan terms to allow clients to repay the end-of-term loan at any point within the cycle, with no penalties for pre-payment. Not only that, but AMK also responded to the income volatility question (particularly the risk of crop failure) with a flexible credit line product that spread risk over more than one growing season (see Box 'The credit line product').
