Prateek Shrivastava

Jason Loughnane

Supply chain finance can enable just-in-time credit, benefitting merchants, financial service providers, and more

Article

In emerging markets, small merchants often struggle to keep their shelves stocked. Since many of these merchants aren’t being served well by the traditional banking sector, they can’t use credit to stock up on enough inventory to meet demand. The challenges small businesses face are a massive global problem — nearly 300 million micro and small enterprises worldwide face a <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/topic/smefinance" target="_blank" rel="noopener noreferrer">combined $5.2 trillion credit gap</a>. We recently explored the idea of <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/small-businesses-play-a-huge-role-in-communities-but-they-need-help-31665eac1ef1" target="_blank" rel="noopener noreferrer">supply chain finance (SCF) as a tool to drive financial inclusion</a> for these businesses.
Emerging technology platforms that allow substantial data collection in the supply chain make supply chain finance solutions possible. This data can enable small merchants to manage their cash flows and business inventory better, and it can unlock funding for them, even if they don’t have a robust formal financial history. Just-in-time credit, which is a line of credit offered to small merchants when they place orders with their suppliers, can have benefits throughout the supply chain. For example, Heineken Mexico distributes half of its volume through small merchants across the country. They currently have financing agreements with their larger wholesalers, such as Walmart, which allow for payment to be received in 60–90 days from delivery, whereas most of their small merchants are obliged to pay the same day in cash. If Heineken could partner with a financial service provider to offer just-in-time finance to these small merchants, they might be able to ensure better sales as they would no longer be competing for whatever cash the shop has on hand that day.
Supply chain finance involving the last mile distributor and a small merchant is classified as downstream finance. The graphic below illustrates how downstream supply chain finance works. Since many small merchants lack a formal credit profile, a financial service provider reviews the merchant’s supply chain transactions, such as order and payment history, and then agrees to pay the supplier on behalf of the merchant. The merchant will repay the provider the invoice amount and any finance charges over the term per the agreement. In this scenario, the financial institution mitigates risk by ensuring that the funds are used to purchase the specific inventory items.
<img class="progressiveMedia-image js-progressiveMedia-image" src="https://cdn-images-1.medium.com/max/1440/1*6lVnLOKEEQR84PkaFb0h4w.png" />
Increasing penetration of smartphones and strong data networks in emerging markets make it easier than ever for businesses to place orders, access financial services, and make payments. Improvements in technology and connectivity also mean that the downstream supply chain finance model is now within reach, even for small merchants. While financial service providers have a valuable opportunity to serve this market, their model needs to be data-enabled and technology-driven to scale sufficiently and make a meaningful dent in the massive funding gap for small businesses. An enabling ecosystem for developing downstream supply chain finance products should include:

<ul class="postList">
 	<li class="graf graf--li">Digital payments from merchant to supplier for inventory delivered.</li>
 	<li class="graf graf--li">Digital invoice management by suppliers and merchants.</li>
 	<li class="graf graf--li">Digital inventory management systems, allowing transparency of downstream inventory levels to the supplier.</li>
 	<li class="graf graf--li">The ability for the supplier or merchant to quickly and easily apply for credit against its receivables or invoices due.</li>
</ul>
It’s also critical that the solutions are developed with the right actors in mind. Based on the size of the suppliers, distributors, and merchants, different types of financial service providers may be involved. Microfinance entities would be most familiar with micro and small merchants, whereas larger commercial banks will have relationships with large fast-moving consumer goods (FMCG) suppliers and distributors. The graphic below lists the ecosystem actors necessary for downstream supply chain finance to work and depicts the flows of goods and financing across the supply chain.
Each actor will have their role to play and accrue benefits from a data-driven, micro-enterprise supply chain finance model for financial inclusion.
<img class="progressiveMedia-image js-progressiveMedia-image" src="https://cdn-images-1.medium.com/max/1440/1*DKsH9TiwvSsuNbnjoTOiUw.png" />
Just-in-time financing could help small merchants manage their businesses better and improve their lives. Smart solutions will take into account the interests of the involved stakeholders so that the benefits outweigh the risks for all. Our next piece in this supply chain finance series will dive deeper into the business case for an integrated solution that delivers value to each of these actors.

How supply chain data can unlock credit for small businesses

<div class="byline">Recently, we traveled to Myanmar to see for ourselves how the arrival of technology is changing the long-isolated country. We followed Aye Aye Myint, a loan officer at our partner DAWN Microfinance, as she made her rounds checking in with clients. Watch the video above to see how her work is already being transformed by new systems in place in her office, and then read on for more from our Yangon-based colleague Jason Loughnane about the next steps in bringing the benefits of digital finance to the women entrepreneurs DAWN serves.</div>
<div class="byline">
The future of finance in Myanmar is digital. The population has rapidly adopted smartphones, while the economy continues to operate almost entirely in cash. The mobile money ecosystem, while still nascent, is attracting attention from investors and journalists alike. Accion believes that mobile money will enable microfinance providers to substantially increase financial inclusion in Myanmar, and we will continue supporting our partner, DAWN Microfinance, to realize the substantial benefits of this digital transformation.
DAWN’s Founding and Accion’s Involvement to Date
<a class="markup--anchor markup--p-anchor" href="https://www.facebook.com/DAWNMicrofinance/" target="_blank" rel="nofollow noopener noreferrer">DAWN Microfinance</a> was founded by <a class="markup--anchor markup--p-anchor" href="https://myanmar.savethechildren.net/what-we-do/livelihoods" target="_blank" rel="nofollow noopener noreferrer">Save the Children Myanmar</a> in 2002 to provide loans to groups of pregnant women, enabling them to afford prenatal care. Over the next 12 years, DAWN grew to become the third-largest microfinance institution in Myanmar, one with a strong reputation for client service and social mission, providing group-guaranteed loans to low-income women running small businesses from their homes.
When Accion began working with DAWN in 2014, the institution served just 25,000 clients, had a loan portfolio of approximately $2 million, and employed 60 loan officers across 11 branches. The loan operations process was highly time-intensive: loan officers visited groups of clients each morning to collect weekly loan installments, then spent their afternoons at the branch completing paperwork and manually preparing their “collection sheets” for the next day. New client training, marketing, assessments, and appraisals were reserved for Fridays, when no loan collections or disbursements were scheduled.
As an investor and partner, Accion worked to overhaul DAWN’s operational efficiency by implementing a basic core banking system that generates daily collection sheets for each loan officer. After twelve months of process design, piloting, training, and implementation, DAWN successfully completed the transition to a computerized portfolio management system, helping to improve loan officer caseloads by more than 30%. In the nearly three years since Accion partnered with DAWN, the company has grown to serve over 94,000 clients with a loan portfolio of almost $15 million, and employs over 200 loan officers across 27 branches.
DAWN’s next ambitious project is to use digital financial services to eliminate cash from its lending operations. Loan officers continue to spend at least four hours per day collecting cash installments from borrowers, counting the cash multiple times, and preparing cash disbursements for new clients. DAWN is working with agent networks and mobile money companies to design and test solutions that would reduce time spent managing cash. If successful, this project would enable loan officers to spend considerably more time recruiting and training new clients, conducting more thorough assessments of client businesses, providing financial literacy training to existing borrowers, and working with clients who are struggling to repay their existing loans.
Smartphones and Mobile Money
According to the Myanmar Telecommunications Ministry, <a class="markup--anchor markup--p-anchor" href="http://www.mmtimes.com/index.php/business/technology/21466-ministry-puts-mobile-penetration-at-90-percent.html" target="_blank" rel="nofollow noopener noreferrer">over 90 percent of Myanmar adults</a> had a cell phone by the end of 2016 (up from just 7 percent in 2012), with smartphone penetration approaching <a class="markup--anchor markup--p-anchor" href="https://digitalinasia.com/2017/01/09/myanmar-33-million-mobile-users-smartphone-usage-80/" target="_blank" rel="nofollow noopener noreferrer">80 percent of all mobile phones</a>. Meanwhile, according to <a class="markup--anchor markup--p-anchor" href="http://www.lift-fund.org/making-access-possible-map-myanmar-demand-supply-policy-and-regulatory" target="_blank" rel="nofollow noopener noreferrer">UNCDF’s 2013 Making Access Possible Report</a>, only 6 percent of adults use a formal financial institution, and only 30 percent have access to a regulated financial service provider, such as a microfinance institution or credit union. Unregulated moneylenders and pawn shops are the most popular way for poorer Myanmar citizens to access credit. A <a class="markup--anchor markup--p-anchor" href="https://myanmar.savethechildren.net/sites/myanmar.savethechildren.net/files/library/Lives%20on%20Loan_3.pdf" target="_blank" rel="nofollow noopener noreferrer">2015 Save the Children survey</a> of three low-income areas in Yangon found that 85 percent of the population relied on short-term loans, and half of these loans were for food and basic needs. These unregulated sources of credit come at a steep cost — <a class="markup--anchor markup--p-anchor" href="http://www.mmtimes.com/index.php/opinion/19326-maturing-microfinance-in-myanmar.html" target="_blank" rel="nofollow noopener noreferrer">10–20 percent per month for an unsecured loan</a> and 3–5 percent per month if the borrower offers collateral, typically a small piece of jewelry, but pawn shops will also accept the family’s cooking pans. Digital loans, disbursed to a smartphone, can give low-income clients access to credit in cases where they would otherwise be forced to rely on a high-interest moneylender.
Simultaneously, Accion is helping DAWN design loan products to reach higher-income microentrepreneurs whose businesses are too large to benefit from a group-guaranteed microloan, but not large enough to qualify for a loan from a commercial bank. Using tested cash-flow analysis tools developed and implemented by Accion’s partner institutions around the world, DAWN will be able to offer uncollateralized loans to higher-value borrowers, enabling them to hire more staff, grow their businesses, and reach more customers. With the right partnership in place, these borrowers may be able to depend entirely on mobile money to transact with DAWN, freeing them to focus on managing their business instead of visiting their bank branch.
The confluence of high smartphone penetration with limited access to financial services presents an ideal proving ground for microfinance institutions and mobile money providers to offer digital financial services to Myanmar’s poor and underserved. In partnership with Myanmar’s emerging mobile money providers, Accion and DAWN Microfinance are working to capitalize on this unique moment in Myanmar’s economic development to ensure that financial services become as ubiquitous as the smartphone.


[caption id="attachment_7848" align="aligncenter" width="1024"]<img class="wp-image-7848 size-large" src="http://content.accion.org/wp-content/uploads/2017/07/Copy-of-_42A5137-1024x681.jpg" alt="The Future of Finance in Myanmar is Digital" width="1024" height="681" /> DAWN loan officer Aye Aye Myint meets with beverage stand operator Daw Yin Yin Htwe[/caption]
We thank FMO, MetLife Foundation, and the Keith V. Kiernan Foundation for their generous support for our work in Myanmar.

</div>

The future of finance in Myanmar is digital

During a recent work training in Bogota, Colombia, I had the opportunity to visit one of the country’s leading microfinance institutions (MFIs), <a class="markup--anchor markup--p-anchor" href="https://www.bancompartir.co/#!inicio" target="_blank" rel="nofollow noopener noreferrer">Bancompartir</a>. It originated literally from the ashes of a natural disaster — the eruption of the Nevado del Ruiz volcano in November 1985, which killed over 25,000 people. A small organization, Actuar, was created to form solidarity groups for collective savings and lending to help the homeless and suffering survivors of the volcano’s wrath.
In 1988, Accion partnered with Actuar to found a non-profit microcredit foundation. Over the following almost-30 years and several name changes, the non-profit became a regulated MFI and then received a commercial banking license. Today, Bancompartir serves over 400,000 clients across 93 nationwide branches, covering 60% of all microfinance borrowers in Colombia.
Bancompartir has adapted to changes in Colombia’s microfinance environment more quickly and effectively than its peers, consistently driving innovations across Colombia’s microfinance and banking sectors. For example, Bancompartir was among the first MFIs to offer individual loans, having realized that in a country where social trust had been shredded by an ongoing <a class="markup--anchor markup--p-anchor" href="https://www.cfr.org/backgrounder/colombias-civil-conflict" target="_blank" rel="nofollow noopener noreferrer">narcotrafficking-fueled civil war</a>, solidarity-group lending could not be sustainable.
During our recent visit, my colleagues and I heard about Bancompartir’s strong commitment to financial education and respect for their clients. As with all MFIs, nearly all of its clients are financially vulnerable, and many experience shocks that affect their ability to keep up with payments. But its collections agents are trained not to harass delinquent borrowers, but rather to encourage them to visit their loan officer to renegotiate their terms. A prominently displayed poster reminds the call center that “Recoveries happen with a handshake, not with a net.”
When microfinance institutions transform from NGOs into regulated commercial banks, “<a class="markup--anchor markup--p-anchor" href="https://www.womensworldbanking.org/wp-content/uploads/imported/pdf/english/stemming_the_tide_of_mission_drift_microfinance_transformations_and_the_double_bottom_line.pdf" target="_blank" rel="nofollow noopener noreferrer">mission drift</a>” is a frequent result, as the added pressure of profitability may lessen their focus on loaning smaller amounts. Bancompartir has taken active measures to avoid this outcome, offering free savings accounts and first-cycle loans of as little as $80. The institution uses innovative technology to serve these small-amount borrowers, such as its “Credit Factory,” a team of 96 data specialists that compares each loan applicant against every other applicant that has ever been approved, rejected, repaid a loan successfully, or defaulted. The resulting credit score allows the bank to operate with an exacting level of efficiency; most borrowers learn within 4 hours whether their applications have been approved, with a loan disbursement typically offered within 24 hours of the application.
At the same time, Bancompartir seeks to serve its clients who may be able to graduate from microenterprises to consolidated businesses. To keep them from leaving for a more commercially-oriented financial institution, Bancompartir offers small and medium-sized enterprises higher loan amounts — up to $100,000, at low interest rates. The bank has also recently begun offering 20-year mortgage loans to low-income customers who could otherwise never afford to own a home. In all, Bancompartir offers 48 different lines of credit and 12 different savings accounts. This wide range of products enables the company to individually tailor the financial service provided to each client. Bancompartir’s commitment to customization and client satisfaction helped it earn a <a class="markup--anchor markup--p-anchor" href="http://www.smartcampaign.org/storage/documents/Certification_Reports-August_2014/FINAMERICA_Certification_Output_EN.pdf" target="_blank" rel="nofollow noopener noreferrer">4-Star SMART Certification</a> in November 2014.
Bancompartir continues to provide innovative financial services to Colombia’s poorest citizens. Leveraging a <a class="markup--anchor markup--p-anchor" href="https://www.usaid.gov/sites/default/files/documents/1862/ATTACHMENT%205%20ACCESS%20TO%20FINANCIAL%20SERVICES%20IN%20RURAL%20AREAS%20-%20MARKET%20STUDY.pdf" target="_blank" rel="nofollow noopener noreferrer">loan guarantee facility from USAID</a>, Bancompartir offers banking services in some of Colombia’s most remote, rural, and conflict-stricken regions. Bancompartir employs a network of hundreds of banking correspondents, as well as a third-party agent network, to extend its services without having to build and staff permanent branches in these remote areas. Bancompartir also won an award for financial innovation for its “Miracle” (El <a class="markup--anchor markup--p-anchor" href="https://www.bancompartir.co/#!ahorro/ahorro-credito-milagroso" target="_blank" rel="nofollow noopener noreferrer">Milagroso</a>) loan product, which credits a portion of the borrower’s repayment to her savings account, helping to build up her personal savings while simultaneously repaying her outstanding loan. (We’re proud to say that Accion helped to develop that product, as did the Bill and Melinda Gates Foundation.)
Accion continues to be a partner of Bancompartir. We take great pride in building and improving microfinance institutions around the world. For my own part, as a manager at <a class="markup--anchor markup--p-anchor" href="https://www.dawn.org.mm/" target="_blank" rel="nofollow noopener noreferrer">DAWN Microfinance</a>, Accion’s partner in Myanmar, the visit to Bancompartir afforded me an opportunity to envision our future — one with a diverse suite of products customized to the needs of each client, operating with a level of efficiency that allows us to continue serving the most underserved clients in the country.

Responsive microfinance for a changing economy: Colombia’s Bancompartir

DAWN Microfinance and financial inclusion in Myanmar

Better laws, increased competition, and rapidly expanding mobile access are all converging to transform Myanmar’s microfinance sector. <a href="http://dev.metlife.thecharlescreative.com/articles/myanmars-economic-revolution/">As Accion first reported last April</a>, Myanmar’s economy is evolving into something radically new after decades of isolation, and financial services to low-income, underserved segments are playing a major role in driving growth.

Accion’s partner in Myanmar, <a href="https://www.dawn.org.mm/">DAWN Microfinance</a> recently conducted a survey among its current clients. One of them, Maya (not her real name), had taken her first loan from DAWN of US$15 five years ago, when she was just selling dried fish from a straw mat laid on the roadside. Maya now borrows US$200 from DAWN every six months to expand her inventory, selling rice, eggs and cooking oil, among other groceries and household goods. Her business initially provided her family of five with a small amount of supplementary income. But with the growth in sales she attributes to her loans from DAWN, Maya’s business now contributes a greater share of the family’s income than her husband’s daily wages do.

As she plans how to expand her enterprise even further, Maya hopes to diversify into clothing sales, a venture which would require at least US$500 in new capital. Her aspirations reflect those of many DAWN clients—they see enormous potential to grow their businesses if more capital were available. The average current loan size for DAWN is just under US$200, but the average desired loan amount is US$475. Of course, not every client who says they want a larger loan could actually manage one. But their confidence in asking for more testifies to the potential they see to grow their businesses.

<a href="http://frontiermyanmar.net/en/new-rules-a-fillip-for-microfinance-sector">Recent directives by the Central Bank</a> should make it easier for microfinance institutions to access funding and in turn serve more clients with larger loan amounts. And access to financial services, in general, is also expected to expand. A <a href="http://www.uncdf.org/Myanmar">2013 UNCDF study</a> found that 70 percent of Myanmar’s adult population lacks access to any financial service. Myanmar’s government, however, has outlined <a href="http://www.uncdf.org/en/myanmar-financial-inclusion-roadmap-2014%E2%80%932020">plans to reduce that figure</a> by at least 10 percentage points by 2020. DAWN’s survey suggests that progress is being made. Only 9 percent of DAWN’s current borrowers had taken a loan before being offered one by DAWN, but since receiving their first loan, 23 percent have been offered a loan by another microfinance institution, suggesting increases in access and competition.

Competition is also helping drive services better tailored to the needs of customers. Since Myanmar’s microfinance industry <a href="https://www.cgap.org/publications/microfinance-myanmar-sector-assessment">was formally regulated in 2011</a>, providers have rarely faced competition when opening in a new area. Microfinance interest rates are capped at 30 percent per year, a fraction of <a href="http://www.mmtimes.com/index.php/opinion/19326-maturing-microfinance-in-myanmar.html">the amount charged by unregulated moneylenders</a> which, at 10 percent or more per month, can exceed 200 percent on an annualized basis. It has historically been easy for microfinance institutions, with much more attractive (albeit mandated) interests rates, and with few competitors, to find new clients just by word of mouth. Institutional growth was limited only by how much equity capital its shareholders were willing to invest in the company.

But with competition now increasing, a simple low-cost loan is no longer sufficient. Customers are asking for larger loan amounts, more personalized repayment schedules and health and life insurance for their families. And as clients become more familiar with financial services, they are demanding higher-quality products—a huge step in the development of the industry.

As Myanmar’s financial services sector, and its economy as a whole, continues its dramatic growth, microfinance institutions must continue to improve their offerings. Building on the core banking system implemented with Accion, DAWN is examining opportunities to leverage technology and data to improve the quality of its products. Mobile phone penetration and smartphone adoption are <a href="http://www.mmtimes.com/index.php/business/technology/17727-myanmar-named-fourth-fastest-growing-mobile-market-in-the-world-by-ericsson.html">rapidly increasing</a> across Myanmar as well, and although not all of DAWN’s clients can afford a high-end phone yet, DAWN expects to offer microfinance loans via mobile channels in the near future for those who can.

The widespread optimism about the future of Myanmar’s economy is warranted. With the new government committed to <a href="http://frontiermyanmar.net/en/treasury-bond-auctions-a-step-in-the-right-direction">responsible fiscal management</a> and <a href="http://www.nytimes.com/2016/09/16/world/asia/myanmar-sanctions-economy-us.html?_r=0">US sanctions to lift</a>, Myanmar will benefit from increased interest from global businesses. Even as the government aims to make Myanmar a more attractive place for companies to do business, DAWN is working to ensure that Myanmar’s entrepreneurs will benefit from the vast economic opportunities that the entire country is now poised to enjoy.

This post originally appeared on <a href="http://partners.wsj.com/metlife/multipliers/articles/enabling-new-business/" target="_blank" rel="noopener noreferrer">The Wall Street Journal's Multipliers of Prosperity</a>, in partnership with the MetLife Foundation.

Enabling new business in Myanmar

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The following is from an interview with Daw Thet Thet Oo, 48, who with her husband runs two businesses in North Okkalapa township, in eastern Yangon, Myanmar. She’s a client of Accion partner <a class="markup--anchor markup--p-anchor" href="https://www.dawn.org.mm/" target="_blank" rel="nofollow noopener noreferrer">DAWN Microfinance</a>, which <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/enabling-new-business-myanmars-microfinance-sector-powers-economic-growth-5992eb7b8fef" target="_blank" rel="noopener noreferrer">specializes in serving women entrepreneurs</a>. DAWN and Accion have worked together <a class="markup--anchor markup--p-anchor" href="http://partners.wsj.com/metlife/multipliers/articles/myanmars-economic-revolution/" target="_blank" rel="nofollow nofollow noopener noreferrer">since 2015</a>, and the partnership was formed to offer financial services to a <a class="markup--anchor markup--p-anchor" href="http://blogs.accion.org/features/myanmar-the-final-frontier/" target="_blank" rel="nofollow nofollow noopener noreferrer">largely underserved population</a> in Myanmar. Since then, <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/growth-disruption-microfinance-myanmar/" target="_blank" rel="nofollow nofollow noopener noreferrer">financial services</a> in Myanmar have <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/fintech-in-myanmar-leapfrogging-to-mobile-money/" target="_blank" rel="nofollow nofollow noopener noreferrer">evolved</a> and technology has <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/mobile-money-in-myanmar-cash-digital/" target="_blank" rel="nofollow nofollow noopener noreferrer">spread rapidly</a>.
Like so many in Myanmar, now that the country’s economy has begun to open up to the outside world, she’s eager to access the kind of financial services that are only just starting to become available. Here is Daw Thet Thet Oo’s story, in her own words.
“We have 14 staff that work in our two businesses, and we treat them like family. My husband runs our printing press business, and I am in charge of the rice snacks. Our staff come from the local community, and we pay them a good daily wage. They come in each morning at 8 a.m. and leave at 5 p.m. When the business is doing well, I like to reward my workers with a group retreat to a park or a nearby pagoda. We also celebrate whenever a worker has a birthday.

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<figcaption class="imageCaption">The family print shop</figcaption></figure>
“I only finished high school, but I’d like for my sons to attend university. They are only 11 and 9 years old now. The older one likes to learn English, the younger one excels at math. Maybe one of them will take over the family business, but the other one has no interest in it.

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<figcaption class="imageCaption">Daw Thet Thet Oo and her family</figcaption></figure>
“I have two bank accounts, but I don’t borrow from the bank. I only save a little bit in my accounts, I mainly use them to receive transfers from my family. When I need money for the business, I ask my family to send me money, and then I collect it from the bank. The loan from DAWN helps because I don’t have to ask my family for as much, but I still need to borrow from them if we have to fill a large order. I’d like to be able to borrow a much larger loan directly from DAWN, instead of having to ask my family for money, even though my family doesn’t charge me any interest.
“My biggest hope is that I can keep growing this business and hire more staff. It makes me happy to have so many people relying on my business for their income, for them to be able to take care of their families because of this work.”

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<figcaption class="imageCaption">Rice snack production</figcaption></figure>
Interview conducted by <a class="markup--anchor markup--p-anchor" href="https://medium.com/@jasonloughnane" target="_blank" rel="noopener noreferrer">Jason Loughnane</a> for Accion

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