April 30, 2004
Money, money, money
I don't blog much about work here. Partly that's out of discretion; mostly, though, it's because a lot of my work is pretty technical, and I don't think too many people would be very interested.
Still, this week I happened to run across some interesting statistics. By chance, my work had me dealing with three different sorts of financial instruments -- mortgages, microfinance loans, and factoring. And I was intrigued to find that all three have been undergoing explosive growth in the last few years.
Here are some numbers.
Mortgages -- we all know what mortgages are, yes? Borrowing money from a bank, pledging your land or apartment to secure payment. Very common and normal in the US and Western Europe.
But before about 1999, this pretty much didn't happen in Romania. Lots of reasons... unclear title (ownership) of land, bad recording systems, antiquated legal system, cautious banks, you name it. Basically it was almost impossible to get a mortgage, and when you did, rates were incredibly high.
They're still pretty high. But the mortgage market has just started to take off. In 2002 there were about $150 million worth of mortgages issued in Romania. In 2003, that number rose to about $450 million. And in 2004, it's expected to hit around $750 million.
$750 million is either a lot or a little, depending on how you look at it. After all, it only works out to about $40 worth of mortgage financing per Romanian citizen -- residential and commercial, combined. $750 million would represent the total mortgage loan for a typical small American town. Hot Springs, Arkansas has more mortgages than all of Romania.
On the other hand, it's pretty impressive for a market that basically didn't exist just five or six years ago. And it's not hard to imagine Romania having a 5 to 10 billion dollar mortgage market by the end of the decade.
Microfinance loans -- these are small commercial loans, less than $20,000 and for terms of two years or less. Most of them are from nonbank lenders.
Right now, the complete microfinance portfolio in Romania is about $35 million. That's not much... but it's up from $16 million in 2002 and $9 million in 2000. And it's expected to rise to around $75 million by the end of 2005.
Those numbers are still pretty small, but it's important to remember that the average microfinance loan is around $4,000 or so. So we're talking about roughly 10,000 loans to individuals and small businesses this year, rising to around 20,000 by the end of next year. Still only one Romanian in a thousand... but it's a start.
Factoring -- factoring is when a business sells its accounts receivable, usually to a bank. "Accounts receivable" are the debts that people owe to a business for goods and services provided. So, for instance, your phone bill is an account receivable for the phone company... until you pay it, at which point it's cash.
Now, a businessman may sometimes want cash RIGHT NOW, instead of waiting 30 or 60 or 90 days for his customers to pay him. So a bank will offer to buy his ARs -- at a discount, of course -- for cash. The businessman gets a quick hit of money, and the bank gets a steady stream of income as the customers pay off their debts.
Factoring has been around in Romania since the mid-1990s, but only on a very modest scale: $12 million in 1995, $15 million in 1996. But in the last few years it has begun to explode. Last year, about $225 million worth of accounts receivable were factored, and that number is expected to be around $350 million next year.
As with mortgages, these numbers are either large or small depending on how you look at it. Great Britain, with about three times the population of Romania, factored over 100 billion dollars of debt last year. On the other hand, factoring barely exists in several transition countries -- Bulgaria didn't start until 1999, and factored only about $20 million last year. And the growth rates are, to say the least, encouraging.
The deeper significance of all this, I may pick up in a later post. For now, what's interesting is that three separate and distinct financial instruments have all shown explosive growth in the last few years. Growth from a very, very low base, yes. But if these growth rates are maintained for just a few years -- a big "if", I know -- it's going to start having some remarkable, and very noticeable, effects.
Posted by douglas at April 30, 2004 04:56 PMThree cheers for capitalism and a growing middle class!
Posted by: Royce at April 30, 2004 06:14 PM“Beautiful credit! The foundation of modern society. Who shall say that this is not the golden age of mutual trust, of unlimited reliance upon human promises?” – Mark Twain
A field with which I become more enamored each day, Doug. But I have some questions, if you don't mind:
a) Local savings or are these instruments being financed by outside investors looking for above-normal returns?
b) What do mortgage maturities or terms look like?
c) Fixed rates or some kind of ARMs?
d) What's the nature of exploring a consumer or small firm's credit rating in Romania? Do credit bureaus or some analog exist, or is lending done on the basis of who the banker recognizes from the local equivalent of Rotary Club meetings?
Posted by: Bernard Guerrero at April 30, 2004 09:21 PMHi Bernard,
Good questions all.
a) Microfinance loans are almost entirely financed by outside money. Some of this is donor money (like the World Bank and USAID) but more and more of it is private money -- looking, as you say, for above average returns. Interest rates in Romania are still very high.
b) I don't know much about the details of mortgage financing here yet. That is, I know some of what's going on, but I don't yet know what's "normal". Possibly because "normal" is still emerging.
That said: terms of 10-20 years are not unusual, and interest rates are, as noted, high.
c) It's not fixed rate vs. ARM here. It's euro-denominated vs. leu-denominated. Right now euro-denominated loans are much more common, because nobody entirely trusts the leu. Although it's been a reasonably stable currency recently, there were two bouts of serious high-speed inflation in the last 15 years. So most borrowers and lenders are more comfortable with loans denominated in euros.
This is still a little tricky, though, because it assumes the leu will undergo a certain amount of inflation (it's been running around 10% for the last couple of years) and a corresponding drop against the euro. If inflation swings higher or lower than that, then it hurts either borrowers or lenders accordingly.
The nightmare scenario, of course, is if the leu suddenly drops far and fast against the euro. Then nobody will be able to pay back their euro-denominated loans.
d) No credit bureaus yet, which is one of several reasons interest rates are high. They're working on it, though.
I think I'll do a quick followup post, because you touch on an interesting point.
Doug M.
More about how those of us in hard-currency climes might invest in a micro-loan offeror, please. I'd just as soon take a flyer on something like the Bailey Building and Loan in an emergent nation's version of Bedford Falls as plunk it down on the next Enron...
Posted by: Pouncer at May 3, 2004 06:59 PMVery good question. You can find a mixed grab-bag of investment funds at this page here. I know it's not a complete listing -- it doesn't mention Africap, for instance, which is a small fund investing in African microfinance. But it's a start.
Some of these funds are really philanthropic or, at least, nonprofit. Others are serious, two-fisted capitalists. The page doesn't distinguish, unfortunately, but you can noodle around with the links.
Also, some are teensy-weensy and some are startlingly huge. You'll notice one link to Oikocredit, a Dutch group that "promotes global justice by challenging people, churches and others to share their resources through socially responsible investments and by empowering disadvantaged people with credit."
That sounds like something a couple of pot-smoking hippies are running out of their garage. But Oikocredit is running nearly 200 million dollars of OPM.
(Mind, Oikocredit is sort of a special in-between case, neither pure charity nor business; they pay dividends, but never more than 2%, because profit maximization is not what they're about. So an investment in Oikocredit will produce a steady trickle of money, but less than a bond or a CD. My point is just, some of these guys are surprisingly large.)
In addition to these, there are a lot of private funds that are starting to diversify into investing in MFI. It's not a huge market, but it's an interesting niche -- and, as noted, rates of return can often be surprisingly high.
(For a list of reasons the market isn't bigger, go to this page and scroll down to "Minimal External Economic Conditions Before MFI Borrows Internationally". There aren't so many places that fit those conditions. And then there aren't so many MFIs that fit the "Minimal Internal Conditions", either. Maybe in a while.)
Doug M.