western cis • moldova rural finance corporation...

Western CIS • Moldova

Rural Finance Corporation Moldova Prepared by • Adrian Danet Reviewed by • Aline Kraemer Sector • Microfinance Enterprise Class • Large Domestic Company

Case Study • Rural Finance Corporation Moldova 2

Executive Summary

"3 key elements: team, clients and quality of our services are the key factors that, during our work, have created and continue to create value in the Rural Finance Corporation (RFC)." 1

Mr. Ion Gangura, President of RFC in 2009

The Rural Finance Corporation (RFC) is a non-bank financial institution that has been functioning in the Republic of Moldova since 10 years. RFC tries to maximize profits for its shareholders and operates in a free and competitive market, with some direct and indirect support from the state. RFC is an innovative, visionary and profitable enterprise. It is based on a vision that values fulfilling people’s needs, whether those people are employees or customers. Its mission is to take direct action against poverty in Moldova and promote rural development by offering favourable financial services and micro-credit (which are usually nonexistent or underdeveloped in rural areas) to farmers and entrepreneurs, and indirectly by providing financial education to entrepreneurs found in these environments.2 RFC was formed through a joint collaboration of the World Bank, the Moldovan Government and the first Savings and Credit Associations of citizens (SCAs) of Moldova.3 The company was supposed to serve as a financial facility for the SCA network – which as of 2009 accounted for 398 shareholder associations. The shareholders are also the primary customers of RFC, and together with RFC, act as a financing system for the SCAs’ members. This system aims to both make money and keep the value created in the rural space and inside this micro-finance chain. SCAs are currently involved in providing financial assistance to 75,000 customers (mainly members of the named SCAs). The company offers loans to poor people, who have a chance to get loans and invest them, usually in income generating activities, whilst implementing money distribution systems that can ultimately reduce the carbon footprint (by reducing the need of people to go to the city and physically take the money). The economic results of this company are also important, as after almost 12 years of operation, RFC is the Moldovan market leader in loans granted (1/4 of the market space), accounting for almost 29 % of the industry profits, and showing a real capacity to obtain results with fewer resources involved. The financial, social and economic success of such an endeavour is inspiring and proves that doing business with the poor can be a profitable enterprise while creating value for the community as a whole.

1 Interview with Mr. Ion Gangura, president of RFC in 2009. 2 Ibid. 3 (2010). Retrieved 2009, from Corporatia de Finantare Rurala: http://www.microfinance.md/ro/


Introduction "Our vision is to create, in the coming years, an alternative to the banking system in close cooperation with the local Savings and Credit Associations (SCAs) in Moldova".

These are the words of Mr. Ion Gangura, president of the Rural Finance Corporation (RFC), one of the most important microfinance companies in Moldova. Back when RFC was formed in 1997 with an initial capital of 20,000 MDL (about 5,000 USD at the time), this statement may have seemed slightly challenging.4 However, his words have been supported by the achievements of the company over the last 12 years.

The mission of RFC is “alongside with Moldova’s strategy for poverty alleviation, to provide financial services to farmers and entrepreneurs at favourable conditions and thereby contribute to rural development.”5

Market and Location Context MOLDOVA Moldova is one of the poorest countries in Europe, with an average monthly salary of 2,550 MDL (227 USD). Between 1999 and 2003, over 37 percent of the population moved out of poverty, the largest absolute decline in poverty in the Europe and Central Asia region over this period. Starting in 2004, however, poverty reduction has stalled despite continued vigorous economic growth. The increase in poverty rates seen in 2005 heightens concerns that rapid economic growth is no longer reducing poverty. The poverty rate was 28% in 2005.6 The vast majority of the population lives in rural areas. Agriculture accounts for about 25% of the GDP, although a 13.7% annual decline in agricultural production was observed between 1990 and 20007. More than one million Moldovans (of a total population of 3.5 million people) live and work abroad. In 2008, 61 percent of Moldovan emigrants worked in Russia, about 14 percent were in Italy, and the rest worked in other EC countries and Ukraine.8 According to data provided by the World Bank, the volume of remittances from abroad accounts for about 31 % of the country’s GDP in 2008 - the second highest ratio in the world, after Tajikistan.9

MICROFINANCE IN MOLDOVA The microfinance market has a modest share in the country's financial system, but also “a growing and promising one” 10. Latest statistics show that 24 companies in Moldova operate

4 MDL is the designation of Moldovan national currency - Leu. At the time of writing, the exchange rate was 1 USD = 11.2 MDL. 5 Annual Report 6 World Bank report on Moldova. 2007. 7 (2010). Retrieved 2009, from Encyclopedia of the Nations: http://www.nationsencyclopedia.com/ 8 (2010). Retrieved September 2009, from Wold Bank Group: http://www.worldbank.org/ 9 World Bank report. 2009. 10 Interview with Mr. Ion Gangura, president of Rural Finance Corporation. 2009.


in the microfinance market, holding total assets of MDL 2.4 billion11 (an increase of 26.6% since 2007) and a loan portfolio of 1.46 billion MDL.12 Microfinance in Moldova began in 1997, with the definition of the legal framework that enabled the creation of Savings and Credit Associations (SCAs) as bodies facilitating access to basic financial services (mainly deposit savings and credit provision) to farmers and small entrepreneurs in the rural sector. Almost 400 SCAs currently operate in Moldova. They are primarily present in rural areas of the country. Most of these SCAs have been created with the help of RFC as a deliberate strategy for creating a supportive business structure. RFC advocated for the creation of these SCAs in order to both create a market and gradually allow SCAs to enter the RFC organization as shareholders. ”RFC has created the SCA system in rural Moldova and for poor people it is much easier to have a loan issued in their village than to go to a bank, where it is much more difficult to obtain even a small loan.” - Mrs. Efimia Sula, manager SCA Botna.13 The last few years corresponded with periods of significant growth, as the microfinance sector almost doubled in 2006 from 2005, and grew by 52% in 2007. In 2008, seven new companies (all of them foreign owned) entered this market segment, attracted primarily by the significant margin of profitability witnessed in the recent years by the major players in the market, namely RFC and ProCredit. However, Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department, states, “If anybody wants to do the things we do in a very similar way, they must start from the beginning, while we have accumulated a lot of experience.”14 In 2009, there were 398 active associations (SCAs) in the market with 125,244 members, (50% of whom were active in 2009), out of which 54,451 contracted loans. 6,713 people deposited money into these SCAs in 2009.15 The disparity between the number of depositors and creditees reveals the lack of financial resources in those rural areas (and therefore lack of opportunities to save) as well as the seeming reluctance of people in rural areas to deposit their money outside the banking system, in any kind of associative structure. Currently, due to the global crisis, the financial system in Moldova, including the microfinance industry, has suffered. The remittances from abroad fell to less than 30% of their 2008 levels, while there was a significant negative impact on the real economy with industrial production falling by over 25% and a drop in exports by over 30%. In addition, RFC suffered from an impairment in the arrangements it had with various international financial organizations (like EBRD and EFSE - the European Fund for Southern Europe) to get additional financial resources for its clients needs. Delays were experienced in the

11 214 mil USD 12 130 mil USD 13 Interview with Mrs. Efimia Sula. 2009. 14 Interview with Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department. 2009. 15 Comisia Nationala a Pietei Financiare. 2009. “Buletin Trimestrial II.”


agreement and issuance of refinancing lines after the financial crisis, due to an increased degree of prudence by international lenders.

Rural Finance Corporation HISTORY

The history of the RFC is closely tied to the history and evolution of the SCAs, as RFC builds on the SCA network and, at the same time, serves as a financial facility for SCAs. In 1997, the World Bank and the Moldovan Government together with nine SCAs established RFC, with the Moldovan Government and the SCAs owning 20% and 80% of shares with voting rights respectively. The company was intended to be a central payment unit for the SCAs. RFC grew consistently over time, both in terms of capital and number of stakeholders. In 2009, it had a working capital of USD 9,000,000 and a total of more than 300 SCAs as RFC shareholders. Today it is entirely privately owned. Back in the late 90’s, when Moldova's economy was predominantly agricultural, predisposed to seasonality and with a pronounced lack of liquidity, financing agricultural services and production was a risky undertaking. Nevertheless, RFC risked orienting its policies and financing efforts to serve the people situated at the base of the socio-economic pyramid, and saw its risks pay off.16 RFC’s rapid expansion is due to the fact that it “created” its market from the beginning by increasing its customer base (SCAs) and evolving together with their needs. RFC has been directly involved in:

• Creating the initial legal framework that enabled the evolution of SCAs in Moldova, adopted in 1997/8, and also the consistent legislative changes in 2007, allowing SCAs to offer more sophisticated financial products to their members;

• Assisting in setting up (through the Rural Development Centre) about 220 SCAs in Moldova;

• Transferring to the SCAs the needed operating procedures and software (provided to them free of any charge).

“RFC is the base pillar in the development of the SCAs. In our SCA, during our past various crises we received the RFC’s support, for instance as legal advice and support in various litigations. They even prepared our business plan and helped in elaborating our internal regulations,” confirms Mrs. Efimia Sula, manager SCA Botna.17 The financial services offered together by the SCAs and RFC represent today the main financing options in rural Moldova. RFC addresses the extremely high lending need present in rural areas with targeted services, and operates in a relatively uncontested market given that 16 The term “base of the pyramid” or BoP refers to the largest, but poorest socio-economic group, namely the four billion people who live on less than $2 per day. 17 Interview with Mrs. Efimia Sula, manager SCA Botna. 2009.


very few banks (like Moldova Agroindbank) have shown their desire to enter the rural financial markets.

RURAL FINANCE CORPORATION - TODAY

”I am sure that a farmer needing, for instance, 15.000 MDL18 and asking for it from a bank will not get his loan, while we are giving him the money.”19

Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department.

RFC is currently one of the largest microfinance companies in Moldova, with the highest portfolio of outstanding loans. RFC grows along with its clients and is currently more and more oriented towards direct lending to SMEs, which have outgrown the rather low funding possibilities of SCAs.20 RFC operates from a headquarters office located in Chisinau and a network of 8 regional centres in rural areas across the country. Customers are served by mobile teams of specialists as well as regional centres. RFC has 50 employees, of whom half are credit specialists and eight are management consultants. RFC customers are represented by the 240 SCAs comprising of 75,000 members and over 900 direct clients (SMEs and individuals).21 The average RFC loan portfolio is nearly 400 million MDL (35.7 million USD), two-thirds of which is distributed to SCAs and one-third as direct credit mainly to small and medium enterprises. The average loan granted to an individual member by the brokerage of an SCA is 9,000 MDL (800 USD), and to an SME (direct credit) is 100,000 MDL (8900 USD). During all its years of operation, RFC has been a profitable institution, with a good, balanced portfolio and following international best practices. The results obtained by RFC are a confirmation that doing business in poor, rural areas can be a win-win situation that leads both to the development and financial education of the local communities, as well as to impressive rates of return for the company, which are much higher than those obtainable by commercial banks in urban areas.

Description of the Business Model RFC’s main objective is to ensure the access of small farmers and rural entrepreneurs to financial services in villages. This is done through both the system of SCAs and direct financing. One specific point of RFC activity is that they do not give loans for consumption, but rather for small rural production. “Beyond the material gain, RFC wanted to favour the production system in the rural areas; by crediting the consumption you cannot have this - you

18 About 1340 USD 19 Interview with Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department. 2009. 20 The average loan granted by SCAs is 9,000 MDL (about 803 USD). 21 The remaining 150 SCAs are inactive.


only make money. Only by crediting production RFC can attain its strategy,”22 confirms Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department. The “non-bank” financial institution RFC23 thus covers a very specific niche of the financial market, represented by clients who previously had no access to financial markets due to lack of information and knowledge, small sizes of businesses and loans requested, lack of collateral, and the insecure character of investments in agriculture.24 RFC serves two main categories of clients - SCAs and SMEs. SCAs are microfinance institutions with a special status, as they manage their affairs independently from RFC and are supervised by the National Commission of Financial Markets (NCFM).25 SCAs represent the most important customers for RFC in terms of resources allocated. The SCAs then give loans to their members in rural areas. In this respect, SCAs act like brokers for RFC, whilst sharing the profits obtained form this activity with the corporation. The main advantage for the customers is the ease of obtaining funds and the fact that they can pay money back on better terms. “If I have to take a loan from a neighbour or from a relative I have to give him back the money in a month or so … with the help of the Corporation I can repay in years.”26 However, SCAs’ activities are now going to expand from merely being brokers to granting loans from their own funding to their members and to the general public (based on their license rights granted by the state) without any consent, approval or any other kind of interference from RFC.27 As per today, the credit committee of the SCA internally reviews loan applications made by SCA members, and then they are submitted to RFC, where an analysis vis-à-vis conditions of eligibility and financial prudence rules approved by the National Commission of Financial Markets (NCFM) is made. If the decision is positive, the money is transferred (via the operating system of commercial banks) to the account of the SCA. From there it is usually distributed in cash to the receiving member or transferred on the bank cards distributed to some SCA members.

22 Interview with Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department. 2009. 23 Non-bank financial institutions are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license and is not allowed to teke deposits. Operations are, regardless of this, still exercised under banking regulations. 24 Source: RFC website 25 An SCA can be started by at least 50 members and their activity is defined by the some geographical limitation (the boundaries of a village of a mayoralty). This protects associations from risks connected to lack of information about member clients, but on the other hand, hold back the quantity and quality growth and development of those associations which have the potential to mitigate these risks. This problem is discussed currently within the SCA system, and there are various opinions regarding its interpretation. It is possible that in the near future some changes to be operated into the legislation governing SCA activity, which will include SCA functioning, and will eliminate these constraints. 26 Interview with Mrs. Domnica Russu. 2009. 27 Funds from the yearly profits accumulated by SCAs from their activities.


The second category of RFC customers are entrepreneurs from rural areas, whose numbers have grown over time and whose needs exceed the credit disbursing capabilities of the SCAs - where the average loan is around 9,000 MDL (803 USD). Entrepreneurs are directly approached and served by the RFC and their numbers are increasing yearly.28 They have increasing and sophisticated financing demands. RFC addresses them in a straightforward manner and offers them direct credit with amounts of about 100,000 MDL (about 9000 USD). The process of lending to SMEs is different. In this case, credit officers of the RFC make the decision after reviewing the business plan developed by the applicant. Most of the times, the applicants are offered free assistance of one of RFC’s partners, the Rural Development Centre (RDC), in coming up with a business plan. As the RFC states on its website, “Our success and exclusivity is based on the fact that our credit activities are supplemented with a full set of assistance required by the client in management, accounting, financial planning, building relationships with fiscal authorities, etc.”29

FINANCIAL MODEL RFC’s own capital increased from 62,000 USD ten years ago to about 7 million USD in 2008, while its loan assets increased during the same period from 340,000 USD to almost 38 million USD. Its net profits increased from 60,000 USD in 1998 to 1.9 million USD in 2008. The company is defined as a financial facility for the SCA network – which as of 2009 accounted for 398 associations. The SCAs are the primary customers of RFC and also its shareholders. Together with RFC, they act as a financing system for their members. This system aims to both make money and keep the value created in the rural space and inside this micro-finance chain. SCAs are currently involved in providing financial assistance to 75,000 customers (mainly members of the named SCAs). “We are very close to the SCAs. We are offering loans directly to them but at the same time we assume a huge risk here, as we give those loans without asking for collaterals and this situation is unique in the credit market,”30 states Mr. Oleg Ceban, SCA credit department director in RFC. Although the nominal interest rates can be perceived as “extremely high” (The highest rates during RFC activity reached 28-30percent, whilst according to latest figure of August 2009, the rates were 22-24%) they have made the company’s financial growth possible. In addition, they can be justified by the emergent characteristic of the financial market in Moldova in general and the rural micro-credit market in particular. Since RFC asks for collateral from SMEs, but not from SCAs, it has to compensate for that risk by higher nominal interest rates. In those conditions the gross margin realized by RFC (around 10 %) does not seem to be exorbitant, given the emergent conditions in Moldova.

28 For the evolution of their numbers in the last 10 years, see the graphs in the annexes. 29 (About Microfinance, 2010) 30 Interview with Mr. Oleg Ceban, SCA credit department director in RFC, 2009.


According to company officials, “The fact that RFC’s added value is not transferred abroad, but remains in Moldova, and that it adds to the capitalization of the system (RFC plus its downstream SCAs) is a positive point of this situation. The natural future evolution of the financial markets in Moldova from emergent towards maturity will lower those margins and will normalize this transient and short situation – that seems to be a characteristic of the early stages of capitalism.”31

RFC: CREATION OF ADDED VALUE FOR CUSTOMERS The company management defines the value provided by RFC to its customers as follows:

Strengthening the management capacity of SCAs administrators, which is currently low.

Attracting a larger number of members from the rural population in the RFC-SCA system, so the services offered by RFC can be accessed all over Moldova.

Widening the spectrum of products and services provided by SCA and improving their performance indicators.

The reason for RFC’s success, according to the company, is its operational efficiency and effectiveness and the high quality of its loans portfolio. RFC has benefited from the experience of institutional actors like the World Bank, EBRD, and the European Fund for Southern Europe (EFSE). Following their advice and training, RFC was able to develop a sound business model implementing international best practices in the realm of microfinance. This business model enabled an accumulation of 90 million MDL (about 8 mil USD) in capital, which is very important taking into account the fact that the shareholders of RFC are SCAs, who lack financial resources and have limited opportunities to participate in the capitalization of RFC. The ability to attract sources from institutions and commercial banks on a local and international basis has been another key success factor for RFC. Another key element is the fact that RFC managed to create and sustain a motivated team of six people involved in the company since its start in 1997. RFC also adds value through rapid, transparent procedures, and by customizing its offerings to the needs of rural communities. “Competitors of RFC have offered us many good deals, but we prefer to stay with the RFC due to the relationship we developed”.32 Mrs. Efimia Sula, who manages SCA Botna, explained that her preference for RFC over its competitors is also because she receives additional support from RFC as value-added services such as training, information sessions etc. Also, her SCA has formed a close personal relationship with the RFC manager team that is responsible for the geographic area in which her SCA operates.

31 Interview with Mr. Sandu Samatailo. 2009. 32 Ibid.


Constraints and Solution Strategies of RFC’s Business Model When RFC started its business in Moldova, the company faced a number of market constraints.33 One of the first constraints RFC faced back in 1997 was due to the regulatory environment, as there was no legislative framework governing microfinance in Moldova. Thus, RFC actively engaged in a policy dialogue with the Government until the latter defined a legal framework. They were supported by the World Bank and other microfinance actors. Moreover, in 2007, the system defined 10 years ago now had become inadequate for the regulation and the supervision of microfinance activities. Again, RFC took advantage of institutional reform of this system in 2007 to engage in a policy dialogue, aiming to establish new rules for licensing new regulating bodies for SCAs (NCFM), widening the spectrum of activities and territory that SCAs may carry out in the microfinance business and defining a framework to strengthen the SCAs. In addition, RFC advocated for the creation of Central SCA that could define and improve the structure of the SCA system in Moldova and could be a source of liquidity and reserves. Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department, concludes, ”The legal framework is ultimately formed by us. We show the state where the problems are and they react.”34 Another significant constraint was the lack of knowledge and skills of the people who set up this business. Here RFC could benefit from its partnership with the World Bank, whose specialists provided training and transferred the needed knowledge to RFC. In addition to this, the company faces a lack of knowledge about financial products as well as about business planning amongst its customers. RFC builds these capabilities together with its NGO partners, the Rural Development Center (RDC) and the National Agency for Rural Development (ACSAACSA). Finally, an important constraint arose in the past few years in relation to access to finance for RFC, as Moldova suffered an escalating political instability combined with a crisis of state institutions. Moreover Moldova has not yet signed a refinancing agreement with the International Monetary Fund. This has led to a low country rating (at non investment grade), leading to insufficient capital to finance all of SCA’s needs. RFC invested in removing market constraints. The company received an independent rating from a recognized rating institution in Europe, which allowed attractive refinancing rates and increasingly larger refinancing amounts, attracting international donor agencies as partners.

33 The analysis presented in this section is based on the Strategy Matrix of the first UNDP GIM report “Creating Value for All”. The matrix analyses market constraints that companies faced implementing an inclusive business model and how they overcame them (solution strategies). It is a tool that aims to help entrepreneurs and analysts to scan possible solutions for the constraints the business face by deconstructing and filtering out important information on the main constraints and corresponding solutions of the business model. More details on www.growinginclusivemarkets.org. 34 Interview with Sandu Samatailo. 2009.


RFC - AN INNOVATIVE BUSINESS MODEL

RFC is the main actor in the rural microfinance space in Moldova and uniquely, a system of companies and a regional network of hundreds of SCAs, which helped to spread the micro-credit phenomenon in rural areas throughout Moldova. RFC was started as a local solution to local problems. SCAs are both the clients and shareholders of RFC. There are about 400 SCAs that jointly hold about 90% of the shares in RFC. And in turn, the SCA system is RFC’s main customer, contributing to more than 70% of the annual RFC turnover of 367,7 million MDL in 2008.35 SCAs have their own representatives on the RFC Board. RFC is the first Moldovan microfinance company that has gained international recognition for its financial, structural and operational success.

Business and its Relationships “[…] our customers and shareholders, namely the SCAs are […] important actors. […] 3 key elements: team, clients and quality of our services are the key factors that, during our work, have created and continue to create value in the Rural Finance Corporation (RFC).”36

Mr. Ion Gangura,RFC president in 2009

There are numerous organizations that collaborate with RFC and assure its success. RFC initially received financial support from the Government of Moldova as well as the World Bank. It also has a cooperative relationship with the Rural Development Centre and the National Commission of Financial Markets (NCFA).

SAVINGS AND CREDIT ASSOCIATIONS (SCAS) AND THE CENTRAL ASSOCIATION OF THE SCAS

Savings and Credit Associations are the keystone of the entire system of microcredit and microfinance developed by RFC in Moldova. Each SCA is started by at least 50 people, mostly living in the geographical borders of a village. RFC’s business model is built on the SCA network and the SCAs are its most important clients. The SCAs, created by the Rural Development Centre (RDC) and RFC, act like retailers and brokers in their geographical areas, mainly by disbursing RFC loans. The SCAs have a crucial impact in the rural areas of Moldova. They have eliminated some former barter relationships and helped to inject some liquidity into the post-Soviet economic system in the villages. Unlike other conventional microfinance and microcredit systems created in other less developed countries, the system implemented in Moldova operates primarily with funds obtained by RFC from the World Bank and commercial banks that are transferred from them through the SCAs system to the end-users.

35 About 38.2 million USD 36 Interview with Mr. Ion Gangura, President of RFC. 2009.


The mobilization of local savings is relatively undeveloped, which causes some structural problems and issues affecting the long term sustainability of SCAs. However, they also offer the opportunity to create a framework that assures the funding needs of the rural population. The National Commission of Financial Market’s (the supervisory body of SCAs) reports are quite critical of the activities of SCAs. Issues raised by the NCFM include the lack of professionalism of the associations’ staff and inconsistencies in the procedures applied in the SCA system. Also, NCFM suggests that the future development of those associations needs to address and solve the following problems and issues:37

The small size of the associations does not provide adequate revenue for a sustainable business.

The SCAs have a pronounced dependence on funding from external sources (RFC, other microfinance companies, the Moldovan Government, etc.)

The managements of the associations seem unprofessional.

They lack adequate organizations at a local level, which can and would contribute to sustainable development and improving quality of services provided by associations to their members;

There is a high default risk, caused by the concentration of loans granted in a specific sector, which is essentially dependent on weather conditions.

About 90% of loans to members of SCA (for amounts up to $800) are unsecured.

Nonetheless, since the default rate is only 2%, it is clear that the above issues do not impact the profitability of the business to a great extent. The Central Association of SCAs (CASCA), is a body created by the Moldovan SCAs.38 CASCA thinks that factors such as poverty reduction, income growth at the base of the pyramid and job creation in rural areas (primarily through SCAs system) should be included in the national strategy for sustainable development.39 The Central Association is involved in an intense lobbying effort to establish best practices for the microfinance sector. The new 2007 legislation introduces SCA accreditation under a form of license granting, which allows an advanced territorial presence, expanding the number of financial operations allowed to be carried out and establishes the foundations for strengthening those structures into fewer but more powerful and more viable SCAs.

37 Suggestions found in the strategy of microfinance market development issued by CNP for the years 2009-2012 (http://cnpf.md/file/CNPF/Strategia_07.doc, pages 7-8). 38 The National Federation operated under the old Law of SCAs. Under the new Law approved in 2007, the role of lobby organization is played by CASCA. 39 International Conference on “Sustainable development in microfinance.” 2009.


WORLD BANK AND OTHER DEVELOPMENT AGENCIES

“Everything started with the World Bank’s involvement and the loan they offered to RFC. Even today they supervise our situation and a good part of their help is to create the legal framework and the rules of this market.[…] In turn, I think we are a good success story for the World Bank,” said Mr. Sandu Samatailo, Deputy Chief of RFC lending department. 40 The World Bank (WB) helped to initiate the microfinance market in Moldova and made the first significant amount of money available to RFC. Today, RFC is covers its operational costs, while collaborating with the World Bank through a partnership structure initiated by the Government of Moldova, namely the Consolidated Agricultural Projects Management Unit (CAPMU). This governmental unit aims to keep the coherence and strategic robustness of the agricultural programs financed by the Government, by consolidating all the requests and needs for funding from the Moldovan microfinance companies, aggregating this need and defining a coherent programme of funding and using the money that comes as loans from the WB according to this strategy. The motivation of the WB to help develop the micro-finance market in Moldova was the creation of a free market and an institutional framework for the whole population of Moldova.

THE MOLDOVAN GOVERNMENT THROUGH CLD41 AND CAPMU42

CLD is a financial agency of the Government that operate with the credit lines provided to the country. CAPMU currently manage all projects in the agriculture and rural sectors and have been the key agencies responsible for coordinating the preparation of the Government Rural Investment and Services Project (RISP) that has refinanced a lot of RFC activities. RFC has a good working relationship with the Government.

OTHER ORGANIZATIONS

Other actors (such as the World Council of Credit Unions Inc, European Bank for Reconstruction and Development, Oikokredit, etc) are involved in refinancing the micro-credit activities of RFC (as well as other actors in the microfinance market in Moldova). Their role is to provide financial resources, which RFC redistributes inside rural areas. Except for EBRD, which has a clear development mandate, the relationship of these actors with RFC is based on two goals - the first is to minimize their risk exposures (country risk, system risk, sector and structural risks, etc.) and the second is to maximize the financial performance of their investments by investing in emerging economies where they can get return rates that are 3-4 times superior to those in mature economies. In order to minimize risks for its investors, RFC has put in place the following mechanisms:

40 Interview with Sandu Samatailo. 2009. 41 CLD (Credit Line Directorate) is a structure created by the Government for operating with the credit lines provided by international organisations. 42 CAPMU (Consolidated Agricultural Projects Management Unit) is also a special unit created by the Government to coordinate all the agricultural projects of the World Bank developed in the rural Moldovan space.


a) It voluntarily follows all the standards, criteria and indicators developed by the National Bank of Moldova and imposed to the commercial banking system present in the Republic. This allows a foreign bank to easily compare RFC’s indicators with the indicators of the actors in the mainstream banking system.

b) It is involved in a regular performance appraisal system by the rating agencies, which allow refinancing conditions as "investment grade" especially outside Moldova. The institutional rating of RFC increased from BBB + to A- in just two years.

c) It is trying to advocate its vision in defining (in cooperation with the National Commission of Financial Markets, the National Bank of Moldova and the Government) the Moldovan microfinance system in order to increase the trust of foreign partners and reduce the perceived country risk.

NATIONAL COMMISSION OF FINANCIAL MARKETS (NCFM)

“The National Commission of Financial Market (NCFM) is an independent body of central public administration reporting to the Parliament, which regulates and authorizes the activity of players in non-banking financial market43 and supervises observance of legislation by them.” 44 NCFM acts as a supervisory and regulatory body for all microcredit activities. It ensures a certain degree of legislative coherence at the structural and organizational level of this market and allows for competition under the conditions of a stable market economy. NCFM was formed by the uptake activities of the former National Securities Commission, the State Inspectorate for Supervision of Insurance and Non-State Pension Funds and the State Supervisory Board of the activity of SCAs in the Republic of Moldova. The objective of the NCFM is to strengthen the stability, transparency, safety and efficiency of the financial sector by adopting and maintaining a regulatory and supervisory framework for financial market participants. This ultimately reduces the systemic risk of the financial system, prevents unfair, abusive practices and fraud in the sector and protects the interests of customers and investors. NCFM enforces reporting and market monitoring requirements for all the microfinance institutions, including RFC. In its 2009-2012 strategy for financial market development, NCFM identified an important issue already addressed by RFC, namely the need to apply risk management standards and general standards in non-bank financial market through the harmonization of those standards with the requirements of NBM. According to this institution: “The development of the microfinance sector can be an important pillar for reducing poverty and stimulating private initiative in Moldova and will contribute to financial support to rural areas, stimulating trade,

43 Including pension funds, insurance companies, microfinance companies, SCAs. 44 Art.1, The Law on the National Commission of Financial Markets, Nr.129-XVI. 2007.


farming, the social sector, crafts, local transport and other economical-social sectors in the countryside.” 45

RURAL DEVELOPMENT CENTER (RDC)

RDC is a national NGO that aims to stimulate economic development in villages by supporting farmers and rural entrepreneurs, and facilitating access to loans, agro-technical services, marketing and trade, information, consulting and training. RDC was involved in the initial setting up of the microfinance industry in Moldova, having participated in the creation of more than 220 SCAs. Consultancy services offered by RDC for new and existing businesses include preparation of feasibility studies, evaluation of investment projects, development of business plans, assistance in preparing the necessary documents for obtaining business financing, identification of profitable products and activities and information technology assistance. Up to now, RDC has developed more than 400 business plans for existing and new RFC customers. Through its activities, RDC supported the creation of over 1.000 new jobs in 300 villages of Moldova. RDC assists customers entirely free of charge, since it is funded by international assistance programs and entities like the World Bank, Swiss Agency for Development and Cooperation, USAID, or DfID.

NATIONAL AGENCY OF RURAL DEVELOPMENT (ACSA)

ACSA is an NGO founded by actors including the Association of Rural Extension Consultants, National Farmers Federation and the National Federation of Savings and Credit Associations.46 The goal of the Agency is to support private agriculture by creating and developing a national network of service providers in information, training and consulting services for agricultural producers and rural entrepreneurs. Currently, ACSA encourages the sustainable development of rural communities through a network consisting of 360 consultants. ACSA implements training and consultancy on a variety of topics such as agricultural marketing, agricultural systems and farm management.

45 According to the strategy of microfinance market development issued by CNPF for the years 2009-2012 (http://cnpf.md/file/CNPF/Strategia_07.doc) 46(2010). Retrieved 2009, from National Agency for Rural Development: http://www.acsa.md/homepage.php?l=en


Results Created by the Business ECONOMIC RESULTS

After almost 12 years of operation, RFC is the Moldovan microfinance market leader on loans disbursed with 25% of the market share and accounts for almost 29 % of the industry profits. At the same time, it only accounts for 18% of the total industry assets, demonstrating once more the capacity of RFC to obtain great results with fewer resources involved. During the last ten years, almost 400 SCAs have become shareholders of RFC. Its own capital increased from 62,000 USD ten years ago to about 7 million USD in 2008. The net profit increased from 60,000 USD in 1998 to 1.9 million USD in 2008. However, the most important result is the economic development of local communities. Due to the loans provided by RFC, people’s lives have changed for the better. Among the thousands of people that were supported by RFC, there are many outstanding examples.47

Valentin Craciun, from Morozeni village, was a shepherd in a rural area where financial resources were extremely difficult to come by. He secured a loan of 10,000 MDL (about 890 USD) from RFC together with an ACSA grant of another 10,000 MDL. He used all the money to buy a ram and eight Karakul sheep and managed to substantially increase his income through successful entrepreneurial activities.

A loan granted to Octavian Minascurta by RFC under the Youth Socio-Economical Empowerment Project (YSEEP) program helped this Parcani village farmer to establish a greenhouse. He was able to earn a profit of MDL 60,000 (about 5300 USD) in his second year. Moreover, he provided temporary work for people without a stable job from his native village, contributing directly to reducing unemployment in the Soroca County.

Veaceslav and Nicolae Ochisor are two brothers trained as mechanics, who asked RDC for help to develop a business plan to apply for a loan from RFC. One week after the application, they were approved for a loan of 70,000 MDL (about 6250 USD), which was used for purchasing equipment for a small car service they started in Drochia district. Now they have their own business and offer stable employment to three other neighbours.

Ruslan Axenti from Rediul Mare received free assistance from RDC and obtained a loan from RFC of 40,000 MDL (about 3500 USD). He used the money to buy a drip irrigation system for growing greenhouse tomatoes, to buy greenhouse polyethylene and a broadcaster, helping him to use resources more effectively in the activity of vegetable growing. This work is a source of income enough to ensure both his decent livelihood and hire about 60 seasonal workers each year.

47 The examples above have been supplied by RFC. Some of them are presented also in extend on the RFC corporation website http://www.microfinance.md


SOCIAL RESULTS

RFC’s Mission is to provide financial services to farmers and entrepreneurs on favourable terms and thereby to contribute to rural development. SCA’s members are from among the poorest of the rural populations. As members in the SCAs, they have a chance to get the money needed and invest it in income generating activities and improve their families’ living conditions. The system created in tandem by the SCA and RFC plays an important role in improving the social conditions of SCAs’ members and their families. For example, SCA activity helped villagers in convincing the government to invest in local infrastructure in some remote rural areas. Also, many of the SMEs funded by RFC provide additional services to the population, such as health clinics, Internet services centres, associations, small grocery stores, etc. For instance, in Costesti village, where SCA Botna operates, the number of businesses grew from two (back in 1998) to more than 180 (in 2008). About 150 of them are in the agricultural sector and the rest provide services and/or run small crafts shops. This means that almost 300 people from the village are now self-sufficient, whilst in the absence of financial services they would have been recipients of unemployment compensation from the state.48 Also, as a result of the financial resources invested in this village 30-35 young people were able to start their graduate studies at various Chisinau universities. However, a specific social challenge of the Moldovan microfinance market that should be addressed by the whole industry (including RFC) is the lack of consumer rights protection in the financial services market. This kind of legislation is currently missing - along with some other specific problems like insufficient protection of interests of owners of companies in cases of unlawful deprivation of property, lack of personal responsibility of board members of society, etc.

ENVIRONMENTAL RESULTS

In 2002, RFC initiated a project to operate without cash in its dealings with various SCAs and/or individuals who access loans. The project aimed at protecting the environment by avoiding the transport of large sums in cash between RFC premises and villages. Instead, such transfers would be conducted electronically. With a grant of 40,000 USD from the CGAP Pro-Poor Innovation Challenge, the project was implemented from September 1 2002 for almost three years.49 Unfortunately, it was stopped mainly due to the poor quality of the communication infrastructure at the RFC and SCAs’ headquarters. In order to reduce the carbon footprint of its activities and lower emissions into the atmosphere, RFC also developed and installed a software for SCAs that reduces the need for

48 Obtained for 6 to 12 months after the last employed work, in amounts of 30% to 50% from the minimum wage on the Moldovan economy. 49 About Microfinance. (2010). Retrieved September 2009, from CGAP: Advancing Financial Access for the World's Poor: http://www.cgap.org/p/site/c/about/


trips made by accountants and members that manage the portfolio of loans of various SCAs, called EVIDA. It is a loan management system that was subsequently integrated with RFC’s financial accounting system and then with an OLAP platform that allows data analysis in real time.50 Another environmental program was carried out when RFC’s project implementation partner Moldindconbank issued 1,335 cards that provided access to more than 230 loans (with a total of 151,000 USD), which were transferred directly into the receiver’s bank account.51 In this way, it reduced the need for applicants to travel to RFC or SCA for getting the money. This project demonstrated the environmental concerns of RFC, but unfortunately, the high level of financial resources needed for the infrastructure made it impossible to extend its implementation on a large scale without any assistance from donor agencies. RFC assesses the environmental impact of the specific business when considering funding an SMEs’ business plan, and verifies the overall compliance with environmental standards applicable to that specific business. If there are any environmental concerns and the applicant does not show it is following all the environmental regulations, the project is rejected.

Growth Strategy and Future Outlook “RFC’s vision is to remain the leading financial institution in serving SCA and become an increasingly important player in providing financial services to SMEs in the countryside.” 52

Mr Ion Gangura, RFC President in 2009

For this purpose, RFC pursues a policy of decentralization by testing and evaluating financial products and then transferring them to SCAs with an appropriate level of training, in a bid to reach every corner of Moldova. The current crisis has meant a consolidation period after the rapid growth witnessed in previous years, in which RFC supports and “lives with customers problems”.53 SCAs are currently going through a strong consolidation process and an institutional and structural reform. Future strategies are defined by RFC along and around the SCAs, with the idea that “We want to become, together with the SCAs, a future alternative to the banking system in rural areas, not only as a potential creditor, but as a full provider of banking services.”54

50 OLAP: On-Line Analytical Processing - the ability to conduct data analysis within databases. 51 Beneficiaries receive the money on a “bank card” that is linked with a bank account. However, this bank account cannot be used for normal payments. It is a bank account usable only for retrieving the money from the ATM situated in the village, in the limit approved or “transferred” on this card. People cannot use those “accounts” as normal checking accounts. Source: SCA Costesti. 52 Interview with Mr. Ion Gangura, President of RFC. 2009. 53 Ibid. 54 Ibid.


On the other hand, RFC’s business could be improved in the following years by diversification of the services it offers in rural areas, because RFC focuses today only on providing credit. It could offer supplementary financial products, such as bank accounts, bank transfers or credit cards. RFC is a successful microfinance company that proves doing business with the poor can be an extremely profitable enterprise. It shows a major private actor can do well while doing also good and creating value for the community as a whole. Its example and model can be replicated elsewhere in the world by ambitious public entities that are willing to create private structures that will grow in time, naturally expand and address one of the most important needs at the base of the pyramid – the need for working capital by entrepreneurs willing to change and improve their lives.


References

• Comisia Nationala a Pietei Financiare. 2009. “Buletin Trimestrial II.” • International Conference on “Sustainable development in microfinance.” 2009. • The Law on the National Commission of Financial Markets, Nr.129-XVI. 2007. • World Bank report on Moldova. 2007. • World Bank report on Moldova. 2009. • CNP. 2009. The strategy of microfinance market development.

Personal Interviews with representatives from RFC, RDC, SCAs and independent agricultors, 2009:

Interview with Mr. Oleg Ceban, SCA credit department director in RFC, 2009. Interview with Mr. Ion Gangura, president of Rural Finance Corporation. 2009. Interview with Mr. Sandu Samatailo, Deputy Chief of RFC Lending Department.

2009. Interview with Mrs. Efimia Sula. 2009. Interview with Mrs. Domnica Russu. 2009.

Internet Resources

(2010). Retrieved 2009, from National Agency for Rural Development: http://www.acsa.md/homepage.php?l=en

(2010). Retrieved September 2009, from Wold Bank Group: http://www.worldbank.org/

(2010). Retrieved 2009, from Encyclopedia of the Nations: http://www.nationsencyclopedia.com/

(2010). Retrieved 2009, from Corporatia de Finantare Rurala: http://www.microfinance.md/ro/

(2010). Retrieved 2009, from National Bank of Moldova: http://www.bnm.md/ About Microfinance. (2010). Retrieved September 2009, from CGAP: Advancing

Financial Access for the World's Poor: http://www.cgap.org/p/site/c/about/ Map of Moldova. (2010). Retrieved on November 26, 2010, from Central Intelligence

Agency. https://www.cia.gov/library/publications/the-world-factbook/geos/md.html Strategy of microfinance market development issued by CNP for the years 2009-2012

(http://cnpf.md/file/CNPF/Strategia_07.doc, pages 7-8)


Annex ANNEX 1. ECONOMIC RESULTS OF RFC

Number of RFC shareholders

400380357

335313298

283

176

119

11

34

0

50

100

150

200

250

300

350

400

450

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Number of SCAs credited

148

53

159

200220

255 266 266 269 267

251

0

50

100

150

200

250

300

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Number of direct loans

804

950

1187

990

432

46

155

0

200

400

600

800

1000

1200

1400

2001 2002 2003 2004 2005 2006 2007

RFC capital (mil MDL)

77.5

57.7

45.1

33.9

24.717.4

117.65.3

0.72

0

10

20

30

40

50

60

70

80

90

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Loans issued (mil MDL)

12.72.630.7

55.9 68.9

128

165.4

235.3

293.2326 335.4

0

50

100

150

200

250

300

350

400

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Assets (mil MDL)

420.8

365.5

280.6259.7

177.1147.5

7761.636.6

3.8 13.9

0

50

100

150

200

250

300

350

400

450

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Net profit (mil MDL)

21.1

1412.4

10.2

5.695.48

3.172.63.2

0.67 1.35

0

5

10

15

20

25

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Number of members SCAs credited

95952893

14600

2200027000

3200037000

55200

6640072000

84000

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


ANNEX 2. HISTORY OF RFC The history of the RFC notes the first loan granted by the Government of the Netherlands, for an amount of MDL 375,00055 (in 1997) and the creation of the micro finance legislation in the country, followed by the first major loan offered by the World Bank in 1998 (an amount of 5 million USD). By 2001 there was an increase in the number of SCAs in the country; almost half were created with the indirect help of RFC, by RDC.56 This process was a difficult one, as rural people in the country witnessed their savings deposited in the Soviet bank system vanish - they lost almost everything after the fall of the USSR. Another credit line was open to Moldova by the World Bank back in 2002, at 10.2 million USD and RFC was included in the list of organizations that can obtain loans for its clients. In 2003 an agreement was signed with USAID regarding a warranty portfolio, i.e. a 50% loan guarantee for 1 million USD of loans offered mainly to SMEs in the country. In that year RFC opened 2 regional offices, out of which resulted a total number of 4 regional centers. 2004 brought some major events, like the opening of some regional centers leading RFC to work closer with the end-users in 8 centers throughout Moldova. A major event in that year was also the first ever rating of a micro-credit institution in Moldova by Microfinanza Rating (RFC earned a BBB+). This allowed the corporation to gain access to credit and credit lines both on the local market (calling resources raised by commercial banks in Moldova) and on the international market. Another significant event was the amendment of legislation in Moldova, and the creation of a new regulating body (National Commission of Financial Markets).57 As a result, RFC decided to voluntarily apply all the regulations imposed by the National Bank of Moldova58(NBM) to commercial banks in the country, in order to allow the calculation of banking-based indicators, to have better access to external financing and to compare them with the whole banking system of Moldova, leading to an increased credibility of the business through the level of transparency displayed. In the recent years RFC followed all the limits and indicators of credit ceilings set by the NBM to commercial banks. 2005 witnessed a consolidation of the business, mainly based on the increase in the number of customers that are now big enough to be directly credited (not through SCAs). At the same time, RFC is a founder of a new entity (Garantinvest) together with 8 commercial banks, meant to mutually ensure the loans guarantees by its members. Thereby the microfinance market becomes more attractive for other companies and besides RFC (the market leader in the rural sector), the Moldova Agroindbank, Microinvest, ProCredit and other companies start to enter the market. However competition is still at its early stage and the market is still attractive, allowing for significant profit margins. In 2007 the company increased its international rating from BBB + to A-, allowing a better access to external financing sources and advantageous refinancing interest. The main change

55 About 33,500 USD 56 The other half of SCAs have been created with the help of Moldovan Microfinance Alliance 57 Comisia Nationala a Pietei Financiare. 2009. “Buletin Trimestrial II.” 58 (2010). Retrieved 2009, from National Bank of Moldova: http://www.bnm.md/


in the external environment of the company was the adoption of a new legal framework, which broadened the scope of SCAs activities, by offering them more powers (territorially and functionally) and by introducing a system of licensing in the financial market. 2008 seems to be one of the best years in the recent history of RFC, when a sustained increase in company activity was carried out both thanks to organic development and the structural and economic growth of Moldova. Remittances from abroad (especially from migrant workers in Russia and the EU) have increased and, at their expense, there was an increase in both the scale of funding needs and rural business scope, as the money received from abroad was invested mainly in the agriculture and generated further needs for capital. This year has seen RFC as the main actor financing long term (5-7 years) production and agricultural activities in rural areas, and a switch from “non-guarantee risked financing” to a new vision, of financing by having a guarantee for the loans through either mortgages or the involvement of Garantinvest, mainly due to RFC expansion to bigger loans to SMEs instead of small and less risky ones to rural micro-entrepreneurs.


ANNEX 3. PARTNERS OF RFC


ANNEX 4. MAP OF MOLDOVA

Source: CIA World Factbook59

59 https://www.cia.gov/library/publications/the-world-factbook/geos/md.html. Retrieved on 26th Novemer 2010.


November 2010

The information presented in this case study has been made available to the company in subject to ensure its accuracy and is accurate to the best of the author’s knowledge. The views expressed in the case study are the ones of the author and do not necessarily reflect those of the UN, UNDP or their Member States.

Copyright @ 2010 United Nations Development Programme

All rights reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted, in any form by any means, electronic, mechanical, photocopying or otherwise, without prior permission of UNDP.

This case study was drafted in accordance with the GIM 2.0 research design.

Design: Suazion, Inc. (NJ, USA)

For more information on Growing Inclusive Markets: www.growinginclusivemarkets.org or [email protected] United Nations Development Programme Private Sector Division, Partnerships Bureau One United Nations Plaza, 23rd floor New York, NY 10017, USA

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