Microcredit for Business Purposes
Microcredit for Business Purposes
Business Model Description
Through B2B business model, companies can establish themselves as microcredit lenders that exclusively focus on low income individuals that want to borrow to specifically start small businesses and not borrow for personal consumption.
The microcredit lenders generate revenue from interest rates that must not be too high to main the legitimacy of the social benefits. Moreover, microcredit lenders often provide education on financial literacy and planning to borrowers, and often utilize social mechanisms and group-based lending to help monitor if the borrowed money is really used carefully for business purposes.
This IOA will help reduce inequalities in terms of access to finance as microcredits target low income individuals, help communities reduce the risk of violence from borrowing from informal loans and reduce household debts, and help the government in creating jobs and economic value from the growth of small businesses.
Investors can invest money in helping establish reserves, capital and financial technology for companies offering microcredits for business purposes. Examples of some companies in this space are:
Village Fund (VF) is a government initiative since 2001 to provide microcredit with low interest to low income individuals without collateral. The government first allocated money to establish a revolving fund used for the VF. In first quarter 2016, the allocated money and credit money was over USD 8.4 billion (THB 252 billion) including working capital (1).
Ngern Tid Lor PLC is a non-banking financial institution that provides microcredit. It has been developed under different names and has been in operation since 1980. It was recently funded by IFC to increase lending to micro, small, and medium enterprises (10).
Expected Impact
Microcredit for business purposes allow for low income borrowers to gain access to capital for investments in income generating activities that will develop the grassroots economy.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Thailand: Countrywide
- Thailand: Countrywide
- Thailand: Countrywide
Sector Classification
Financials
Development need
According to Ahmed et al. (2017), traditional banks are restrictive on providing loans to companies, such as social enterprises, or individuals who are not financially stable. This has resulted in many low-income individuals not having access to formal lending, which hinders job creation and upward mobility, and contributes to informal lending due to convenience (7).
Policy priority
The 13th National Economic and Social Development Plan (2023 - 2028) aims to facilitate social upward mobility, reduce income and wealth disparities, promote fiscal policies and laws favoring equal income distribution, and promote access to digital and financial technology for all people (4).
Gender inequalities and marginalization issues
Farmers and labor in the informal sector are likely to be at the greatest risk of falling into the poverty traps and in need of financial aid as a result of COVID-19 impacts. Migrant workers in agriculture and tourism will be at risk due to limited access to economic and social benefits.
Between 2015 and 2018, the poverty rate in Thailand grew from 7.21% (4.8 million people) to 9.85% (6.7 million people) (5).
Investment opportunities introduction
Thailand’s financial engagement is relatively high, and the penetration rates of financial services are above those of other Southeast Asian peers, with more than 80% of Thais having some form of banking account. The market for digital banking is also seen as promising and matured in recent years. (6).
The Thai government has implemented a phased stimulus package to mitigate the economic impacts with a value of USD 64.78 billion until July 2020, equivalent to 8.9% of GDP (5).
Key bottlenecks introduction
Financial scheme during the pandemic is predominantly government-led programs and offers little incentive for the private sector to take part in the stimulus package.
Corporate and Retail Banking
Development need
According to Ahmed et al. (2017), traditional banks are restrictive on providing loans to companies, such as social enterprises, or individuals who are not financially stable. This has resulted in many low-income individuals not having access to formal lending, which hinders job creation and upward mobility, and contributes to informal lending due to convenience (7).
Policy priority
Bank of Thailand (BOT) Strategic Plan (2020-2022) aims to solve high household debt issues and reduce financial vulnerability for the low-income group in partnership with various organizations, and also promote equal access to financial services (8).
Gender inequalities and marginalization issues
About 90% of the poor reside in rural areas of the country. Low-income families and poor families are heavily dependent on agriculture. They have limited access to formal lending as they lack a credit history or collateral to secure credits (7).
In addition, women are faced with difficulties in accessing financial services as women tend to have less land ownership as collateral and lower education, which are factors for granting loans.
Investment opportunities introduction
In 2018, the global credit portfolio of microcredit was USD 124.1 billion. In addition, 139.9 million people around the world borrowed from microcredit in 2018 (9). The market size of microfinance in Thailand is around USD 96.67 billion (THB 200 billion) in 2021. Tech-driven microcredit businesses are expected to emerge in the forthcoming period. (10).
For example, Ngern Tid Lor Pcl, one of the biggest companies in microcredit in Thailand, is expected to continue leaping over the next three years at a 30% CAGR (11).
Key bottlenecks introduction
Microfinance sector in Thailand is heavily dominated by government programs and interventions (e.g., village funds and saving groups for production), and present limited incentives for private commercial banks and/or NGO microfinance operations. The bureaucratic process can also present a barrier for borrowers (12).
Mortgage Finance
Pipeline Opportunity
Microcredit for Business Purposes
Through B2B business model, companies can establish themselves as microcredit lenders that exclusively focus on low income individuals that want to borrow to specifically start small businesses and not borrow for personal consumption.
The microcredit lenders generate revenue from interest rates that must not be too high to main the legitimacy of the social benefits. Moreover, microcredit lenders often provide education on financial literacy and planning to borrowers, and often utilize social mechanisms and group-based lending to help monitor if the borrowed money is really used carefully for business purposes.
This IOA will help reduce inequalities in terms of access to finance as microcredits target low income individuals, help communities reduce the risk of violence from borrowing from informal loans and reduce household debts, and help the government in creating jobs and economic value from the growth of small businesses.
Investors can invest money in helping establish reserves, capital and financial technology for companies offering microcredits for business purposes. Examples of some companies in this space are:
Village Fund (VF) is a government initiative since 2001 to provide microcredit with low interest to low income individuals without collateral. The government first allocated money to establish a revolving fund used for the VF. In first quarter 2016, the allocated money and credit money was over USD 8.4 billion (THB 252 billion) including working capital (1).
Ngern Tid Lor PLC is a non-banking financial institution that provides microcredit. It has been developed under different names and has been in operation since 1980. It was recently funded by IFC to increase lending to micro, small, and medium enterprises (10).
Business Case
Market Size and Environment
> USD 1 billion
According to Ngern Tid Lor Plc, a large public company providing microcredits, the market size of microfinance in Thailand is around USD 96.67 billion (THB 200 billion) in 2021 (23).
Indicative Return
5% - 10%
Microcredit can set different return targets, which will affect the interest rates that are enforced upon borrowers. High return targets will translate to high interest rates for borrowers.
However, the purpose of microcredit is to help low income individuals, so the return target should be at a level that can help the operation be sustainable. According to expert interviews, the ROI should be 5-10%.
Investment Timeframe
Short Term (0–5 years)
According to expert interviews, borrowing periods for microcredit are relatively short compared to traditional loans, which helps make the investment timeframe short.
Ticket Size
< USD 500,000
Market Risks & Scale Obstacles
Control Mechanism
Control Mechanism
Impact Case
Sustainable Development Need
In 2019, around 5.9 million people or 8.6% of the population in Thailand are living below the poverty line (3). One major reason for income inequality is no access to formal lending from poor financial position, lack of understanding and confidence, and inconvenience access to service points (4).
Financial access in Thailand is as high as 97.3% in 2016. 95.8% of households had access to loans, but usage rate is only 35.8%. Although it is uncertain how many households borrow from informal lenders, the biggest reason is convenience, and it can have interest rate of 36% - 1,000% per annum (11).
In Q1 of 2021, household debts amount to USD 470 billion (THB 14.1 trillion) or 90.6% of Thailand's GDP. This number is extremely high with personal consumption equal to 76.6% of the total household debt, while for business purposes is only 18.1% of the total (16).
Gender & Marginalisation
About 90% of low income individuals reside in rural areas and are heavily dependent on the agriculture sector (5). They have limited access to formal financial services as they lack credit history or collateral to secure credits.
During the pandemic, farmers, workers in the informal sector, and migrant workers mostly in the agriculture and tourism sectors have the highest risk of falling into poverty due to limited access to financial services and social benefits (12).
Women face difficulties in having access to formal loans as they tend to have less land ownership for collateral and lower education (4).
Expected Development Outcome
Microcredit for business purposes gives opportunities for low income individuals to start their own business, which contributes to poverty alleviation, decreases income inequality, and increases household incomes to enable necessary spending on health and education (5).
By providing small loans to individuals who typically do not have access to loans from formal financial institutions, microfinance programs can invest in productive or income-generating activities (4).
Microcredit for business purposes can increase the portion of household debt for business purposes and through financial planning and social monitoring systems can also help reduce household debt for personal consumption.
Gender & Marginalisation
Microcredit provides very small loans to unemployed, marginalized, and low income individuals, which allows them to generate an income and, in many cases, begin to build wealth and escape from poverty.
Microfinance programs can assist farmers to continue their farming activities and decrease informal lending.
In 2018, 80% of microcredit borrowers are women, and 65% are from rural areas (8). Women that receive credit can become economically active, financially independent, and ultimately strengthen their decision-making power within the household and community (4).
Primary SDGs addressed
1.2.2 Proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions
Multi-dimension poverty index (MPI) take into account education, healthy lifestyles, quality of life, and financial security. The MPI index was 13.4% in 2019 (3).
Reduce MPI index by 10% by 2037 (6).
9.3.2 Proportion of small-scale industries with a loan or line of credit
Proportion of small-scale industries with a loan or line of credit was 9.04% in 2016 (13).
Data not available. But Thailand had set target small and medium entreprises (SMEs) to contribute to 60% of GDP by 2037 (SMEs contribution to GDP was 43% in 2018) (6).
10.2.1 Proportion of people living below 50 per cent of median income, by sex, age and persons with disabilities
Proportion of people living below 50 per cent of median income, by sex, age and persons with disabilities was 11% in 2018 (17).
Data not available. But Thailand had set target for total income of individuals having income level at bottom 40% of the population to have growth rate of 20% per year by 2037 (total income of individuals having income level at bottom 40% of the population was around USD 3.1 billion or THB 93.1 billion in 2017) (6). Thailand had also set target for individuals having income level at bottom 40% of the population to have better debt management capability and have 40% debt service ratio by 2037 (6).
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Corporates
Public sector
Indirectly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Corporates
Public sector
Outcome Risks
If the borrower’s potential to repay the microcredit and monitoring of investment plans are not carefully considered, borrowers can have even more financial burden from the loans.
Borrowed money can often used for personal consumption, which is not used for income generating activities.
Gender inequality and/or marginalization risk: Microcredit must also target women to help them access to finance. Or else, traditional view of men as household heads limit the role of women in decision-making processes in the household and community.
Most credit target men, while women, especially from poor households, have lower access to finance because of their lack of collateral, and are forced to rely on informal loans. (21)
Impact Risks
Drop-off risk: Low income borrowers have a high default risk that can affect the sustainability of a microcredit operation.
Stakeholder participation risk: Low income borrowers are have limited knowledge and limited access to microcredit distribution channels (11).
Alignment Risk: If social impact is not prioritized, microcredit lenders may set high interest rates that are not affordable for borrowers, and can be seen as profiting off low income individuals.
Efficiency risk: Social monitoring will not be effective if lenders are not embeded into the community. Moreover, administration costs can be high as many borrowers live in rural areas.
Gender inequality and/or marginalization risk: Women, especially low income in rural areas can face difficulties getting access to microcredit from lack of self-confidence, objections from social norms and husbands, or inadequate time and household commitments. (21)
Impact Classification
What
Microcredit offers access to finance, and financial and economic risk protection for the most vulnerable groups in society, which helps alleviate poverty, reduce income inequalities, and promote economic growth.
Risk
Low income individuals may not see insurance as a priority and would rather allocate financial resources else where, and bad economic situation may lead people to discontinue their insurance.
Contribution
Additional contribution is likely better than base case as microinsurance have limited implementation due to high risks involved.
Impact Thesis
Microcredit for business purposes allow for low income borrowers to gain access to capital for investments in income generating activities that will develop the grassroots economy.
Enabling Environment
Policy Environment
The 13th National Economic and Social Development Plan (2023 - 2028) aims to facilitate social upward mobility, reduce income and wealth disparities, promote fiscal policies and laws favoring equal income distribution, and promote access to digital and financial technology for all people (7).
This policy supports the IOA as microcredit can be an important solution in helping Thai people increase their income and upward mobility.
Financial Sector Master Plan Phase 3 (2016-2020) aims to promote financial access to the general public, promote financial access for SMEs and develop their capabilities, and collaborate with relevant agencies to promote market-based financing for large corporates (14). This policy supports the IOA by helping people have more financial access.
Bank of Thailand (BOT) Strategic Plan (2020-2022) aims to solve high household debt issues and reduce financial vulnerability for the low income group in partnership with various organizations, as well as promote equal access to financial services (18). This policy supports the IOA as microcredit can be important solutions to household debts and improve equal access to financial services.
Sustainable Finance Initiatives for Thailand (2021) aims to promote sustainable finance targeting low income individuals, and aims to effectively manage financial risks from climate change, environmental degradation, and social issues through the adoption of robust risk management frameworks (19).
This policy supports the IOA by helping low income individuals gain more access to finance, while also educating and integrating risk management for the borrowers.
Village Fund Policy (VF Policy) has been running since 2001 to provide microcredit with low interest to low income individuals without collateral. The government first allocated money to establish a revolving fund used for the VF. The loans should not exceed 1 year term and USD 666.67 (THB 20,000) (22).
This policy is relevant to the IOA by providing an important case study for the IOA, and how the IOA can address weaknesses of the VF Policy.
Financial Environment
Financial incentives: Revisions of regulations to increase interest rate cap for microcredit to 28% per year for unsecured personal and microcredit loans (9).
Regulatory Environment
Bank of Thailand (BoT) Act (1942) establishes the objectives, scope of work and organizational structure in accordance with international central banking standards to maintain the finances, financial institution, and payment systems stability and efficiency (8). This regulation is relevant to the IOA as BoT is the main regulator of financial services, including microcredit.
Financial Institutions Business Act (2008) regulates commercial banks, finance and credit foncier companies, and is overseen by Bank of Thailand. Microcredit has an interest rate ceiling of 28%, max. loan amout of USD 6,666.7 (THB 200,000), and has no collateral or minimum income requirement (15). This regulation is relevant to the IOA as it stipulates the requirements for microcredit.
Policy Guideline on Microfinance Loans of Commercial Banks establishes guidelines for commercial banks that take into account stability of the financial system and financial institution, risk management, and consumer protection (9). This guideline is relevant to the IOA by providing financial institutions framework for developing microcredit services.
Specialized financial institutions (SFIs) ran by the government, such as the Bank for Agriculture and Agricultural Cooperatives (BAAC) is regulated by the BAAC Act (1966), and the Government Savings Bank (GSB) is regulated by the GSB Act (1946). SFIs are governed by the Ministry of Finance (20).
This regulation is relevant to the IOA as BAAC and GSB are the government's main actors in providing microcredit.
Marketplace Participants
Private Sector
Commercial banks, finance companies, and credit fonciers i.e. Krung Thai Bank, Thai Credit Retail Bank, and Kasikorn Bank, Noburo, Ricult
Government
Specialized financial institutions (SFIs), i.e. Government Savings Bank and Bank for Agriculture and Agricultural Cooperatives, Bank of Thailand, Ministry of Finance
Multilaterals
Asian Development Bank (ADB), International Finance Corporation (IFC)
Non-Profit
Yunus Thailand
Public-Private Partnership
Semi-formal financial institutions i.e. cooperatives, savings groups for production and village funds and relevant government agencies that provide supervision
Target Locations
Thailand: Countrywide
Thailand: Countrywide
Thailand: Countrywide
References
- (1) https://www.bangkokpost.com/business/2118627/financial-system-increasingly-vulnerable
- (2) https://www.bot.or.th/App/BTWS_STAT/statistics/ReportPage.aspx?reportID=775&language=eng
- (3) https://kasikornresearch.com/en/analysis/k-social-media/Pages/Debt-FB-05-04-2021.aspx
- (4) https://www.ldd.go.th/PDF/DevelopmentPlanNo.13.pdf
- (5) https://www.unicef.org/thailand/media/5666/file/Socio-Economic%20Impact%20Assessment%20of%20COVID-19%20in%20Thailand.pdf
- (6) https://www.bangkokpost.com/business/2158459/thailand-ripe-for-a-digital-banking-battle
- (7) https://serialsjournals.com/abstract/21407_ch_33_f_-_ferdoushi_ahmed.pdf
- (8) https://www.bot.or.th/English/AboutBOT/RolesAndHistory/DocLib_StrategicPlan/BOT-StrategicPlan2020to2022-eng.pdf
- (9) https://www.convergences.org/en/119115
- (10) https://www.bloomberg.com/news/articles/2021-10-19/tech-fueled-lenders-replace-loan-sharks-as-thai-borrowing-swells
- (11) https://res.scbsonline.com/stocks/extra/45933_20210615083039.pdf
- (12) https://www.posttoday.com/politic/analysis/91444
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- (2) https://www.nesdc.go.th/nesdb_en/download/article/article_20201112144736.pdf
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- (5) https://stat.mot.go.th/wp-content/uploads/2020/12/Transport-Statistics-2018-Complete.pdf
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- (9) https://www.bot.or.th/Thai/FIPCS/Documents/FPG/2554/ThaiPDF/25540088.pdf
- (10) https://www.tidlor.com/th/about-us/company-background.html
- (11) https://journals.sagepub.com/doi/10.1177/1178622120978203
- (12) https://www.mdpi.com/1660-4601/17/19/7298/htm
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- (23) https://www.bloomberg.com/news/articles/2021-10-19/tech-fueled-lenders-replace-loan-sharks-as-thai-borrowing-swells