Talmage Payne, chairman of the board for First Finance PLC, talks about partnering with the charity Habitat for Humanity
First Finance was licenced to operate as a micro-finance institution (MFI) by the National Bank of Cambodia in April 2009. What makes it unique among the many financing institutions in the country?
Our social mission is to get a person their first home and we’re trying to do that as low in the market as we can go while still staying commercially viable. We’ve distributed over US$1 million in loans to almost 100 clients. More than 70 percent have never had a home or anything before and about 30 percent are people who have a small piece of land.
Has it been difficult to find viable low-income borrowers?
It’s not hard to sell the value of the product. Everyone wants to have a house. [Low-income workers] are just not anticipating that they would ever have the resources and means to do it. So it’s helping them understand how mortgage finance works. We have some of the longest-term mortgages in the country. We need to explain that this is a 15-year loan and what that means. So it’s not, “Hey you should be a homeowner,” it’s helping them understand how they could be a home- owner.
You have just signed a memorandum of understanding with the NGO Habitat for Humanity to take on mortgages for around 1,000 homes of low-income Cambodians. How will this partnership work?
Everyone knows Habitat is good at developing homes. Its target is people who have an income of below one dollar a day. It goes through a three-year process of selecting qualified families in slum areas or the urban poor.
Habitat mobilises those families to begin some savings, then they will identify a piece of land and work with those families and volunteers to build a house at a very low cost. They put sweat equity and some savings into it, but there is still a mortgage that goes on for the remainder of the cost.
We will finance and manage those mortgages for them so they can then take the money raised into another project. We will essentially purchase their existing portfolio.
We can handle the credit and mortgage aspect very well, and they can handle the social aspect of identifying people and building a house.
Will the financing of these loans be altered when they change hands?
I am not sure exactly how this will work. I can tell you that the interest rates we charge will be between 15 percent and 18 percent. We will not make their loans any harsher than they were with Habitat.
Could you reach this segment of the population without partnering with someone like Habitat?
No, without a partner like Habitat I don’t think we would successfully reach them. We would love to have more partners like this in the non-profit space. If we can work lower in the pyramid, I think there is a lot more business down there.
With somebody whose household income is $200 to $400 a month, those are the kind of people who will walk into a bank and say “I heard my friend got a loan and I want to get a loan”. But once you get down to an [income of] a couple dollars a day it requires some sort of partnership. One challenge with that is there are just not enough products in the market. Developers are all building 20-, 40-, 60-, 80-thousand-dollar homes. We found a couple of developers doing things under $10,000. So we have begun some partnerships with them to try to put some special promotions on those types of properties to encourage development.
Does financing loans to such a low-income population present a greater risk to your institution?
The risk is not the clients. Poor and middle-income people here are good credit risks – they pay. Look at the balance sheet of any MFI. The difference with our loan is they are paying over 12 years or 15 years and not six months. They’re still paying $40 a month or $80 or $20, it’s just a longer-term loan.
The risk to us right now is all of our lending is based on equity. Being a new company in a new space is scary for lenders. Everyone is afraid of the mortgage market. Lenders or equity investors are looking to give loans for two to five years, so the risk for us is how we structure our balance sheet. You can’t have a lot of loans that are due to lenders when your money is coming back over a longer period of time.
So who are the investors in First Finance?
We have three great shareholders: Insitor Fund, who provides seed funding to help launch businesses like ours; First Home, which was begun by myself and some other Khmer and long-term expatriates with a lot of experience in microfinance; and Phillips Capital, a Singapore-based financial services company like a Merrill Lynch. They have set up a sort of philanthropic investment fund to invest in these sorts of things.
Do they stand to profit from your investments?
We are seeking a 10 percent internal rate of return over a five- to seven-year period.
Do you have any reservations about returning a profit to shareholders on these sorts of investments?
Every social enterprise has this debate and needs to have the debate. I don’t have any concern with people making a return on investment. But if you want to carry the social enterprise name, name your social goals and work hard on it.
For us it’s looking at the household income that we lend to and driving our portfolio as low as we can go in those different spaces.
I think any good ethical business here benefits the economy. Not everything needs to be a social investment to be positive. We can make more money just loaning to bigger houses and not partnering with Habitat, but can also partner with Habitat and make a return.