Interview with Aleksandr Eryomin, CEO Mikro Kapital

Interview with Aleksandr Eryomin, CEO Mikro Kapital
Aleksandr Eryomin, CEO Mikro Kapital

By Helmuth Fuchs

Moneycab: Mr. Eryomin, you have been appointed CEO of Mikro Kapital in January 2020. What have been the most important decisions you have made since taking over the role, what have been the most important changes you have introduced?

Aleksandr Eryomin: You know, in the Mikro Kapital Group, we try to work as a team, as well as make decisions. We have created a fully fledged collegial decision-making system for today. Therefore, I would say more correctly, I can name the initiatives that I have proposed, and we have already successfully implemented: the creation of Group Investment Committee, the creation of a Group Executive Committee, the creation of a Group Strategy Department, the creation of the collection company in the Group, the purchase of a majority stake in the largest microfinance company in Tajikistan. Perhaps these are the most important changes I made.

«In 2015 we created the second securitization fund and we entered the car sharing sector by founding Delimobil which today is the largest car sharing provider in Russia and one of the largest in the world.» Aleksandr Eryomin, CEO Mikro Kapital

Mikro Kapital has been active in the field of microfinance since 2008, mainly along the Silk Road (Russia, Central and East Asian countries). How has the company developed, how is your company different from a normal bank that provides loans to microenterprises?

Mikro Kapital’s growth has been quite rapid, from one small micro finance organisation we have consolidated our presence in Luxembourg, Switzerland,  Russia, Belarus, Moldova, Romania, Italy, Czech, Armenia, Tajikistan, Uzbekistan, Kazakhstan and Kyrgyzstan. To date we are present in 14 countries, which includes our own Microfinance Institutions and their operational offices, as well as companies where we are presented as one of the shareholders. We propose a very wide spectrum of services for SME clients from traditional lending as well as leasing, factoring, crowdlending, and others. In 2015 we created the second securitization fund and we entered the car sharing sector by founding Delimobil which today is the largest car sharing provider in Russia and one of the largest in the world.

«Mikro Kapital has decided to invest to build a network of MFIs to reach, even in the most remote rural corners, those small entrepreneurs considered non-bankable by the traditional banking system.»

The economy in the countries along the Silk Road is a transition, one with a high level of risks. International banks usually have no high risk appetite and local banks are not so strong and sustainable to provide long term support to SME business.  For this reason, SME clients do not receive the necessary support from banks in that region and this market is attractive for MFIs that want to provide servicing to micro and small businesses. Mikro Kapital has identified this space and decided to invest to build a network of MFIs to reach, even in the most remote rural corners, those small entrepreneurs considered non-bankable by the traditional banking system. In particular, we decided to provide maximum range of financial products to SME clients, not focusing only on traditional lending.

Essentially, we are not, in terms of credit services, different from banks, but we are in terms of flexibility and the ability to quickly reach and support potential new entrepreneurs.

Often, we provide even more reasonable products for the clients than the banks, because we provide services from different subsidiaries from our Group, and not just financial services. For example, we identified that very often clients do not need loans to buying a car but they just need to rent a car, and we developed and provided this service with different options as a short term rent as well as a long term rent. Thanks to this, we have created one of the largest carsharing businesses in the world in less than six years.

Large financial institutions often have little interest in getting involved in the microfinance segment in emerging markets, as their cost structure and the potential profit prospects are not well balanced. How does Mikro Kapital deal with these conditions, what are the biggest opportunities and risks?

This is true, partially. Actually, after MFIs created and designed understandable calculated business models for serving such kind of clients in those countries, large FIs immediately targeted this client segment too to replace MFIs. This is an objective reality.

«Mikro Kapital’s business focuses only on the SME segment in emerging market countries in a strong growth and development phase.»

Success is impossible without a profitable business model in all cases. High-cost structure (cost of funding, hedging cost, operation costs, cost of risk) must be covered by income, without this, a balanced business will not develop.

Mikro Kapital’s business focuses only on the SME segment in emerging market countries in a strong growth and development phase. And there are a lot of such emerging markets with not attractive (for banks) SME client segments, this is an opportunity for us.

Providing a wide range of different services and solutions for our client’s segment creates additional opportunities for us in terms of synergy effects, this is very helpful for profitability. 

Another competitive advantage of Mikro Kapital is to work with the financial institutions in its portfolio. This allows us to control the entire value chain and the potential risks and to remove all intermediaries. The greatest yield is given precisely by this.

Talking about risks, the main are credit risk and FX risk. The mitigation of these risks is actually a very important issue.

Going into detail of our portfolio, the counterparty credit risk, i.e. the final entrepreneurs of the loans (which today are over 150,000 small entrepreneurs / companies) for example, is very low because the management of credit portfolios is covered by the following safeguards:

  • Continued Analysis and implementation of international best practices (credit technology best practices developed in EBRD SME projects);
  • Credit disbursement decisions are taken collectively (in some cases additional experts from Mikro Kapital Corporate Services, which is responsible for managing the company’s credit risk, are involved);
  • The Micro Finance institutions in the portfolio always carefully select potential borrowers and require collateral for loan disbursed;
  • In case of Micro Leasing, the leased assets belong to the leasing company;
  • High level of loan portfolio diversification.

Mikro Kapital provides various funds for its investors, mainly European institutional and private investors. What are the return expectations, how do the funds differ?

Mikro Kapital has 2 main Luxembourg based securitization funds: Mikro Fund and Alternative.

Mikro Fund invests in Russia and Belarus while Alternative invests in other countries along the Silk Road. They attract funds from Institutional and professional investors through issuance of bonds. The bonds can have 11, 24, 36, 60 or 120 months maturity with regarding high yield. Bonds can be issued in EUR, in USD, Swiss Franc and Rubbles. Investors receive 3 months coupon. Of course the yield depends on many factors (term, currency, others). For example, the 24 months EUR bond has a yield from 5.5% up to 6.5% per annum.

The bond is a credit which is senior compared to the capital and the investor is protected by a buffer of capital, in the hand of the shareholder, which is used in case of default.

The countries in which you operate often have challenging political and economic conditions. How does this affect the default risk of your investments, and what means do you have to keep defaults low?

Of course, the default risk of investments in such countries is high. However, for a financial institution, political and economic conditions themselves, what are terrible, are not the real direct problem, but the effects of these conditions on the specific client segment you work with, as well as on how quickly this segment is able to recover from crisis phenomena.

The small business segment is inextricably linked to the real sector of the economy. For such clients, finding a waysand means to keep their business viable is a matter of survival. Therefore, the motivation of our clients to do everything possible to save their business and survive during any changes is extremely high.

On the other hand, companies from the small business sector have an extreme flexibility and can rebuild their business very quickly, they adapt very quickly to the new reality that has arisen because of the crisis. They are used to living in conditions of instability.

«The small business segment is inextricably linked to the real sector of the economy. For such clients, finding a waysand means to keep their business viable is a matter of survival.»

All these features of small businesses greatly help to survive crises with minimal losses and to recover as quickly as possible.

And of course, as a financial organization, we take all known measures to mitigate the risk of our investments default, through:

  • maximum diversification of the investment portfolio for all parameters (types of activities, territories, loan amounts, currencies, etc.);
  • constantly functioning centralized risk control system (reporting, audit, etc.) with risk identification and evaluation;
  • using of a high level of collateral coverage for end borrower’s loans;
  • and other ad hoc solutions depending on the specific situation.

For many people, the pandemic has led to increased concentration, including their financials, on the essentials. How does this affect your business? Have you had to make adjustments to objectives and operational structures?

Actually, our objectives never changed. Supporting the small business development is such an universal and actual objective in different periods, as well as in crisis.

Speaking of last year, certainly the pandemic and the resulting economic crisis affected everyone to varying degrees. But in our situation, the impact was not very dramatic.

«Our funds remained almost stable, so that by June 2020 the PAR30 and 90 had already returned to pre-pandemic levels and the year 2020 ended with a growth.»

First of all, microfinance is an uncorrelated asset class, so it is less affected by the turbulence of the financial markets because it invests in the real economy. The crisis of the last year has confirmed the resilience of investments in microfinance.

Secondly, our funds allow to obtain:

  • a geographical diversification (Private Debt), therefore as already mentioned the countries along the Silk Road: starting from Italy, passing through the Czech Republic, Romania, Moldova, Belarus, Russia, Kazakhstan, Armenia, Uzbekistan, and to reach Tajikistan and Kyrgyzstan.
  • A diversification of the sector, such as: the manufacturing sector (in particular loans to artisans), agribusiness (many economies in the countries in which the funds invest base their economy on agriculture), food and no-food logistics, construction, etc.
  • A diversification of activities (microleasing, microcredit, factoring, crowdlending, car sharing) with more than 150’000 borrowers in the portfolio of the two Funds.

Finally: Our model, in which our funds invest in the MFIs we own which in turn provide loans to micro enterprises, allows control and monitoring of both the investment from start to finish and the loan disbursed.

From the point of view of operational structures, the pandemic crisis has given us the opportunity to boost the digital transformation project that had already begun, thus allowing us to increase our efficiency even during the hardest months of the pandemic.

Of course, we had provided all usual anti-crisis instruments and measures for mitigation of negative effect, as: cost optimisation, smart working, on-line controlling and reporting, etc.

Also in our case, the main risk indicators that recorded the delay in repaying of the loans of 30 and 90-day (PAR30 and 90), recorded an increase between the months of March and April 2020. But thanks to the immediate reaction of our management which turned into concrete and immediate actions in support of our end-borrowers and diversification, our funds remained almost stable, so that by June 2020 the PAR30 and 90 had already returned to pre-pandemic levels and the year 2020 ended with a growth.

One year after the outbreak of the pandemic, we noticed that the PAR 30 and 90 of March and April of this year recorded a decrease of 50% compared to the same months of 2020.

Some of the developed countries, including Switzerland, have coped remarkably well economically with the pandemic. What is the situation for the emerging countries you serve, what is most needed now to ensure a quick recovery?

Accordingly, to the World Bank and the IMF reports issued beginning of the year the countries where we are active will get an average increase in GDP of 5%. This increase will of course depend on widespread vaccination and sustained monetary policy accommodations, which are expected to more than offset the expected partial unwinding of fiscal support. 

Additional investments from, west Europe Countries, World Bank and private investments like big international companies will be key for these economies.

For instance, the World Bank is stepping in to support Kazakhstan in developing this high-value export-oriented sector through the Sustainable Livestock Development Programme which is focused on environmentally sustainable, inclusive and competitive beef production in the country.

Amazon entered in Kazakhstan end of May and added the country in its list of countries accepted to register for selling on Amazon.

Switzerland launched a new development intervention to assist the Republic of Armenia in its efforts related to nature conservation and economic development. The government of Switzerland approved in principle a grant worth CHF 4,500,000 for the “Living Landscapes for Market Development in Armenia” project. 

A Pool of International Financial Organisations is starting long term global projects for restructuring of financial system of Uzbekistan and especially of the banking system.

Of course, for a quick recovery all countries need stability and investments in the real economy sector.

The Corona crisis has massively accelerated digitalization in some areas (video conferencing, home office, remote working…). How has digitalization changed your business, how do you see it developing in the near future?

Definitely digitalization was fundamental to face the consequences of the Corona virus but as I said before, we were already in a digital transformation process before the pandemic, and the situation just boosted this process. In the future our business will become more and more digitalized, faster and more efficient thanks to the new technologies. It is what both our end-borrowers and investors ask us. Thanks to new technologies we were able to maintain almost the same level of communication with both our targets.

Digitalisation is a future in our business. Very soon most parts of our services will migrate in the digital field and this is an evolution which nobody could change.

For the nearest future, our business will develop in parallel in the traditional offline field and in the form of FinTechs, but inevitably flowing from offline to digital. The period of such a transformation will be different in different countries of our presence, so we will be able to copy successful models and examples of digitalization from one country to another. Of course, products and services, as well as sales channels, are the first to be digitized. Then the sales management systems and control functions are robotized. Additionally, we are going to significantly expand the range of our services (naturally in the digital field), going beyond only financial services, but remaining with our small business client segment. There is a lot of debate in the financial world about what will win as a digital development concept: super-App or super-Service concept, but for now this is more a discussion of ideas and not strategies. It would be ideal to integrate both concepts into one.

At the end of the interview, you have two wishes. What do they look like?

I have significantly more wishes :-)))  

I want to build a unique effective Holding Company with an adaptive management model.

But before that, I really would like that this nightmare of the COVID pandemic ends soon and all the restrictions, in particular concerning transportation, would be released completely. So I will be able to travel across countries with no limitations and in a reasonable time to visit my family every weekend.

Mikro Kapital 
is represented in Switzerland by General Invest (Switzerland) AG since 2013 with Asset Management, Advisory and Multifamily office services. Mikro Kapital

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