Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.” The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience. The goals of Five Questions about SRI are fourfold:
- To collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets;
- To reflect on what SRI in emerging markets means to practitioners; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview is with Makhmud Saidakhmatov, CEO, FINCA Microcredit Company, Bishkek, Kyrgyzstan.
FINCA’s mission is to provide financial services to the world’s lowest-income entrepreneurs so they can create jobs, build assets, and improve their standard of living. Its vision is to be a global network collectively serving more poor entrepreneurs than any other microfinance institution (MFI) while operating on commercial principles of performance and sustainability. Based in Washington DC, FINCA currently reaches over one million clients through its worldwide network of 21 subsidiaries in Africa, Eurasia, the Greater Middle East, and Latin America. After 28 years of leadership, FINCA’s outreach is among the broadest and most comprehensive of today’s microfinance networks. FINCA International, Inc. is the parent of 21 operating Microfinance Institutions (subsidiaries), and manages these global microfinance activities through a holding company that allows us to bring additional resources to our mission. FINCA International, Inc.is a non-profit entity that raises funds to: drive research and development to enhance microfinance services; create new services that enhance the lives of clients; carry out demographic, market, and social research that allows us to better understand and measure benefits to clients; and maintain FINCA’s ownership level in FINCA Microfinance Holdings. FINCA Microfinance Holding Company, LLC (FMH) is a subsidiary of FINCA International, Inc. that leverages the funding of socially-responsible investor partners who share FINCA’s mission of providing services to low-income people so they can increase their employment, incomes, and standard of living. FINCA’s country-based subsidiaries are held by FMH, creating a global network of shared expertise. FINCA created its program in Kyrgyzstan in 1995 in order to provide poor but potentially economically active people of Kyrgyzstan with small loans needed to either start up or expand their businesses. In an effort to formalize its operations, in July 2003 FINCA’s program in Kyrgyzstan was incorporated as a joint stock company under the laws of Kyrgyzstan, taking the name “FINCA Microcredit Company” (FMCC), and certified to operate by the National Bank of Kyrgyzstan. Today, FMCC is present in all seven regions of the country: Batken, Chuy, Jalal-Abad, Naryn, Osh, Talas and Issyk Kul running a network of 26 branches and more than 100 outlets with over 1,000 employees. FINCA MCC is one of the largest microfinance institutions in Kyrgyzstan in terms of client outreach, portfolio and geographic presence in the country. FINCA is currently serving over 117K clients running a loan portfolio of over 97MM USD. Makhmud Saidakhmatov, FMCC-Kyrgyzstan’s Chief Executive Officer, joined FINCA in December 2006. Since the joining FINCA, Makhmud has been working in positions, like COO of FMCC-Kyrgyzstan, and CEO of FINCA Azerbaijan. Prior to FINCA, he worked for over four years for “LFS Financial Systems GmbH,” a German consulting and management company specialized in micro and small business finance projects in developing and transition countries. As a banking advisor, he managed projects in Uzbekistan and Tajikistan focused on building and development of micro lending capacities and practices at various commercial banks. In 2003, Mr. Saidakhmatov worked in Azerbaijan assisting the LFS team to develop micro and small lending practices at Access Bank (formerly Micro Finance Bank of Azerbaijan). Mr. Saidakhmatov commenced his professional banking career in 1998, at the National Bank of Uzbekistan, where he worked for three years as a Senior Investment Officer. Mr. Saidakhmatov holds a diploma in economics from the National University of Uzbekistan and a Master’s degree in Economic and Social Studies from the University of Manchester, UK. Mr. Saidakhmatov also holds a professional certification from Stonier Graduate School of Banking administered by the American Bankers Association at the University of Pennsylvania, Philadelphia, USA.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Makhmud Saidakhmatov: Any investment decision considers certain objectives. In many cases, the goal is to obtain higher financial returns on invested capital within a given period of time, regardless of the associated impacts coming from this investment to society, the environment or simply to human beings. SRI is an investment which bears such responsibility – to respect and improve the environment, nature, people’s lives, diversity and development. As such, SRI is an investment that seeks not only financial returns, but rather considers other positive impacts coming from an investment.
With respect to FINCA Kyrgyzstan – we run our business with a certain business philosophy. Our philosophy is to empower and encourage people to strive for a better life though their own aspirations and abilities. We provide them with financial services, so that they increase their assets, create additional workplaces and be self-employed, and thus improve their standard of living.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Makhmud Saidakhmatov: Nowadays, it is not easy to find a business which does not interrelate with society, the environment, human capital and the social sphere. The problem begins at the point when a business assesses its impact on those areas – let it be positive or negative. You can take any type of business and will find that, one way or another, it impacts our surrounding world. So to my mind, mainstream investment simply does not know, or does not want to assess, its impacts on the environment, people, society, or to diversity. Having said that, I would rather say that, compared to other types of investment, companies practicing SRI undertake constant research about their social impact and are interested in benefitting from the improvement of their social targets. For example, if a paper-producing company invests in new technologies and equipment that will decrease the amount of waste products and usage of chemicals, or does more recycling – then to me this could be SRI, given that the company assesses its social performance and social impacts deriving from those investments.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Kyrgyzstan to manage?
Makhmud Saidakhmatov: I think all three are very typical challenges for companies in Kyrgyzstan. However, I would stress the governance and social points as key challenges for companies in Kyrgyzstan to manage. On the governance side, I think there are good movements in the minds of people managing and owning different businesses. They are interested in the investments benefitting them for the long run and not just for an immediate financial return. More and more companies are building good relationships with society / local communities and are involved in different social projects. However, I think there is still a lack of advocacy of socially-responsible business ethics when it comes to real business owners – the people who are investing into the Kyrgyz economy. To my mind, one of the key factors in doing SRI is the support and advocacy of social performance from the shareholders of a company. As such, performance targets for a company, and individual performance of company management/staff – should all include certain level of social targets, and these targets need to be regularly monitored and assessed. In other words, social performance culture needs to be cultivated as part of company strategy and performance, and this need to be advocated by all stakeholders of the company.
As regards social performance –the most difficult challenge is impact assessment of a particular investment or of the company itself. Is it a socially good and friendly company or not? Unfortunately, many limit their analysis to a one-time impact assessment of the investment to society, or to other specific social indicators of the population. For example, we often hear about projects like helping hospitals with equipment, constructing bridges or installing lighting in town streets, etc. The social impact from such investments is obvious, though the company itself might have a different approach in doing its business which may be, in fact, socially irresponsible or even unethical – such as gambling or hunting of animals for leisure. As such, it still remains a big challenge for companies to be able to assess their business model with regards to social performance and social impact.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Kyrgyz companies to analyze?
Makhmud Saidakhmatov: Again, I think the most difficult challenges for investors to analyze are the social and governance items. Not every investor may be willing to invest certain resources of its company in order to perform regular social performance assessments, or manage the company equally, based on financial and social returns, where the latter could be limited by the company to an individual social project without wide-scale impact assessment.
Emerging Markets ESG: FINCA Kyrgyzstan has been operating for over 15 years. How do you measure the impact of investments made to date? Please briefly describe some of the most significant impacts.
Makhmud Saidakhmatov: As mentioned above, the decision to establish FINCA in Kyrgyzstan was itself a huge social event. In 1995, when there was a limited supply of financial services to businesses, not to mention ordinary people – FINCA entered the country with its true social mission to provide financial services to the country’s lowest-income entrepreneurs so they could create jobs, build assets, and improve their standard of living. Throughout the past 17 years, FINCA Kyrgyzstan has been meeting its mission and has provided more than a million microloans to customers totaling almost US$700 million. The average size of a microloan has never been above US$600-900. Microloans were provided to support the low income population in their endeavors to start and support their businesses and families. All these loans made it possible for customers to be self-employed and, simultaneously, create additional workplaces for their countrymen. I can say roughly that every three to four microloans may result in the establishment of one additional workplace – which means that FINCA Kyrgyzstan supported the establishment of more than 250,000 new workplaces in the country. If we consider that most company operations are in remote and rural areas, the social impact from each company is even more obvious. During this period of time, our customers extensively improved their scale of business and living standards. We also prioritize the empowerment of women – who care about their families and the future of their children; as such, over 65% of our customers are women, living and working in villages and small towns.
Our social performance can also be seen in our targets to capture the poor population of the country and support them with financial resources. In 2011, almost 49% of our customers were among the poor and vulnerable category of population of the country (as per the Kyrgyz national poverty definition). In coming years, we plan to increase the percentage of poor and vulnerable population in our portfolio and provide them other financial services through full financial inclusion (savings and deposits).
In order to asses our general social impact and performance, we use the FINCA Client Assessment Tool (FCAT), which measures internationally comparable variables of our customers’ social well-being. The FCAT is implemented utilizing best practice surveying techniques and a rigorous methodology to collect valuable client information, including: A) Expenditures and Assets (e.g. home ownership, food expenditure and other household or social expenditure, expenditure on education, characteristics about the dwelling, etc.). B) Business Activities (e.g. main business sector and number of other businesses clients are actively involved with, and the duration of their businesses). C) Access to Financial Services. D) Satisfaction with FINCA (e.g. satisfaction with the interest rate and the loan structuring, ease of application and disbursement, the extent to which FINCA helped clients achieve their goals). E) Household Demographics (e.g. details about household and head of household regarding their education levels, school attendance, literacy rates, occupation status, source of drinking water, sanitation facilities).
FINCA Kyrgyzstan is also a good and ethical employer which currently provides over 1,100 jobs to young people of the country, of which over 80% are located in regions of the country. Some of the employees have developed professionally and now work in other countries where FINCA operates. We bear full responsibility for the environment and business ethics in our operations. As such, we have a list of businesses which we will never support, such as gambling, businesses involving child labor, production of tobacco or alcohol, environmentally-unfriendly businesses and others.
As regards other one-time and targeted social projects – FINCA Kyrgyzstan has always been a part of communities where it operates and always participates in projects undertaken to improve the social well-being of the population. For example, only last year we financed over 100 different social projects. Among them, I can cite schools which were provided with teaching materials, computers and equipment; village kindergartens which were supported with furniture and other construction materials; and reconstruction of parks and recreational places in many small towns.
Apart from this, we also feel responsible for society’s financial literacy level. Beginning last year, we started to provide special training for the population-at-large on financial literacy. As of today, we have conducted more than 140 such trainings in 135 different settlements and communities of the country. This year we would like to provide over 500 such trainings to the population.