Recently, CE conducted a 2-day workshop with a dual purpose: firstly, to provide an introductory training program on micro and SME finance to 40-odd delegates; secondly, to assess the feasibility of establishing such a lending facility with the express purpose of supporting and growing small enterprises in the DPRK.
Facilitating this was Mr. Hugh Sinclair, an economist, former investment banker and micro/SME finance practitioner since 2002. He is author of the controversial 2012 book, "Confessions of a Microfinance Heretic: How Microlending Lost its Way and Betrayed the Poor".
Mr. Sinclair focused on 8 broad topics:
1. A brief description of debt versus equity, prompted in part by a suggestion from CE that the difference between leverage and ownership was not fully understood in the DPRK
2. Explaining what is micro/SME finance
3. Potential benefits of lending to micro and small enterprises
4. An interactive case study based around a fictional bakery seeking a loan to buy a new oven
5. A discussion of the main obstacles to effective lending
6. Discussing the requirements to offer micro/SME finance in DPRK
7. Conclusion, Q&A
8. Two digressions requested by the delegates during the second half of the second day:
a. Detail on the success of micro/SME finance in Ecuador versus the failure in Nicaragua – two Latin American countries with socialist governments but very different experiences with such financial activities.
b. A more detailed explanation of interest rates relating to loan schedules, including various calculation methods (based in Excel)
Observations
The topics appeared to be of genuine interest to the delegates, and new to most of them. Group participation was initially limited, but the case study opened up the conversation, and particularly during the second day participation was good. Questions tended to be intelligent and demonstrate attention and understanding of the core concepts. Group activities tended to be individualistic rather than team-based, or when team-based, within members of the same governmental or corporate entities.
During the coffee breaks and exercises it was possible to speak to individuals one-on-one, and they were surprisingly open and frank in their opinions and concerns. There were sufficient English speakers to communicate with directly; they also facilitated translation when the official translator was unavailable. The focus of most conversations was which government agency would be best suited to host such a lending facility.
It appears that there is very little lending other than to large state-owned enterprises and joint ventures. Even informal lending (friends, family and moneylenders) seemed very limited or non-existent.
Concerns/unanswered questions
Given that this was just an initial exploration of the issue, it is unsurprising that many issues were left on the table. Some of them include the following:
• It was not clear which government entity would be best suited to host a lending facility.
• The concept of interest was broadly understood, although calculation abilities were limited. However, interest was not understood in relation to inflation, and delegates were very hesitant to discuss inflation, even when prompted directly. The best estimate was that it ranged from 20% to 50%. Mr. Sinclair attempted to gain clarity on this by asking about typical price rises and also by salary rises. It appeared that interest rates should typically be approximately 20% per year, although in the absence of a reference of inflation, this amount seemed arbitrary, and unlikely to be compatible with a sustainable business.
• If hard-currency lending was possible such interest rates might be viable, but this is a delicate topic, only some enterprises are permitted to freely exchange hard-currency, and this topic was not explored in any detail.
• In attempting to estimate the likely demand for loans it was broadly agreed that there was immense un-met demand. However, depending on the definition of “micro or small company” there was little consensus of the number of enterprises that might benefit from leverage, with answers ranging from hundreds to tens of thousands.
Conclusions
Several participants were of interest and will be worth following up on, including a man previously involved in microfinance in the DPRK, a representative from the Ministry of External Economy and a handful of entrepreneurial managers.
There are no fundamental obstacles to establishing a lending institution in the DPRK once the regulatory framework and structure is clarified. Until this point there is little that can be done. There is demand. There is demand for the products clients will produce. A nascent market economy exists. Growth opportunities exist. Repayment rates are likely to be sustainably high. There are few pre-conceived ideas about lending, and early evidence suggests a willingness to learn, and potentially to receive training from experienced people from overseas. If one could focus the institution in such a way that it aligns with some of the needs of the government, for example in the provision of goods suitable for export, or the provision of food, then this will likely gain political traction. If CE can gain more information on possible structures on subsequent visits this year, a more focused set of meetings in early 2016 may be justified. This follow-up could examine the market size in more detail, identify key management, and begin constructing a formal business plan.
This article was written by Mr. Hugh Sinclair, edited by Choson Exchange staff.