Microfinance - Hydrologic (case study)

Hydrologic is a social enterprise legally registered in Cambodia. It produces and markets two ceramic water filters (Tunsai and Super Tunsai as shown in picture below) in Cambodia, especially to rural customers. In 2011 Hydrologic started working with VisionFund to develop a model for selling its ceramic water filters on credit. VisionFund is part of the NGO World Vision and is legally registered as a microfinance institution. The pilot of VisionFund and Hydrologic was supported by the NGO PATH, which also helped to calculate the required interest rate. During the pilot project, PATH subsidised half of the interest rate of 3% (1.5%) and the community members paid the other half (1.5%). When the pilot turned out successfully, the interest rate to 2.8% and activities were scaled up.

Representatives from VisionFund participate in Hydrologic’s village sales meetings and explain the credit offering. Customers can apply for a loan to cover the full cost of a Super Tunsai water filter: USD 36 at 2.8% interest per month over 6 or 12 months. The loans are given individually but the community is required to create a group in which the members ensure each other’s loans.

Once the loan applications are processed, Hydrologic delivers the filters within 1-3 days. VisionFund pays Hydrologic directly, on a monthly basis, for the total number of filters. The enterprise thus receives its money quickly, which is essential in a start-up phase, meanwhile stays the financial risk with the loan provider. VisionFund organises the loan collection with the customers and charges USD 1.50 processing fee for each loan. This MFI collaboration has been fruitful for Hydrologic but there have also been some limitations:

• The geographic areas covered by Hydrologic and the MFI do not overlap completely.
• Implementing suggested changes in the credit process took VisionFund months, as a big structure is not per se willing and able to adapt quickly to complex operations. This asked Hydrologic time and perseverance.
• The MFI’s ability to process loans is slower than Hydrologic’s ability to provide people with loans (selling filters) leading sometimes to lost sales as people step back from their purchase agreements.
• Vision Fund required follow-up visits with all clients in the villages to conduct loan assessments (as opposed to on-the spot processing). This resulted in losing clients, e.g. because they could not be located in the follow-up visits or had changed their purchase decision. Approvals would take a week on average but could take much longer in reality. Hydrologic consistently lost around a third of all orders due to these issues.
• Communication between the two organizations sometimes lacked and VisionFund was not able to send enough staff in the field to establish contracts. This led to skipped purchases, unhappy salesforce, lower profitability and unhappy customers.

To overcome these limitations, Hydrologic decided to develop the relationship with VisionFund and to add an in-house credit facility together with iDE to supplement the available credit of its MFI partners.

Revised model: in-house credit facility

The in-house credit offerings are specifically designed for products promoted by iDE Cambodia, including Hydrologic’s water filters. To date, over 47,800 filter loans have been issued through this facility with a repayment rate of over 99%. The in-house facility hosts 6 supporting staff and 48 field staff to establish contracts and collect money. The mark-up (interest equivalent) income can mainly cover the cost of instalment teams. Currently, Hydrologic’s in-house credit facility is the main instalment channel and there are by average less than 5 filters per month sold through Vision Fund.

The main benefit of operating the credit operations in-house enables Hydrologic to ensure it is properly resourced, with a simplified and streamlined process that supports the sales staff in the field. This has resulted in much fewer cancelled orders due to slow processing and improved morale and results amongst sales people who became frustrated when they lost orders - and their commission whilst working with VisionFund.

Low interest rate high volume

To date, some 72,042 filter loans worth USD 2.3 million have been made with a repayment rate of over 99%. A financial analysis of the VisionFund’s operations showed that the filter loans are profitable and have a number of additional benefits, including new customer introductions and contributions to the VisionFund’s social mission. Approximately three quarters of all water filter loans have been made to women, who typically manage household finances in Cambodian households.

Shared responsibilities and increased trust

A success factor of the new in-house credit facility is that Hydrologic owns the sales function and VisionFund deals with credit delivery and collections only. Licensing VisionFund as a credit provider increased the trustworthiness and willingness to pay; World Vision field staff had dealt with many cases where people did not want to pay an NGO, but are willing to pay to a microfinance institution, reflecting the fact that some people are used to getting things for free from NGOs in Cambodia.

Good after-sales services increase repayment rate

The customer after-sales service should be excellent, otherwise the customers are less likely to pay back the loan to the MFI. At Hydrologic’s customers are able to call and text the customer service centre 24/7 and spare parts are delivered as fast as possible also (for more information see case study on after-sales).

Time-consuming in-house microfinance

Having an in-house credit facility is not without challenges: The operations are very time and resource intensive, especially in Hydrologic’s case where currently in-field, village by village collection is required. Although, in areas where mobile money systems are more established, opportunities do exist to drastically reduce the cost of collection. WING, a mobile money transfer provider, is used to transfer all the money collected from the field to the headquarters with a very low service fee. The revised model has also required developing new skills and expertise within the organization to ensure that the right management and accountability structures are in place to maintain quality client screening, robust cash control and adherence to client protection principles.