Kiva

For the past few months or so, I have been involved as a volunteer translator with Kiva, a San Francisco based company that provides a platform for people to make micro-loans to small business owners in developing country.

I first got aware of Kiva when watching PBS' coverage on the company and its borrowers and partners in Uganda. Actually in the past year Kiva has been gathering a lot of press coverage. Most recently, Nicolas Kristof from NY Times did a very nice op-ed , (and watch the video!), with a very descriptive title "You, Too, Can Be a Banker to the Poor."

I think Mr. Kristof's coverage nicely summarizes why I support Kiva. Growing up in indonesia, I learned that pure charity doesn't really work in most cases, as it often encouraged dependence and irresponsible spending. However, most of the businesses that Kiva targets are mostly ignored by banks. Well, in most developing countries, where securities markets are not so liquid, the traditional commercial bank is the main source of capital, so it can be choosy. If you one is not operating a cell phone network, oil refineries, power plant, millions of hectares of soy or oil palm, etc. the banks will probably not look at its loan proposal. The other alternatives that these small business owners use to have was individual loan broker that charges ridiculous interest and term. In Indonesia these people used to be nicknamed lintah darat or "land leech." This article (in indonesian) describes how a lintah darat uses thugs to collect loan and charges 20% interest for one month loan (that's like 240% a.p.r.). For you finance geeks, the one month Indonesian rupiah government bond annual yield ranges from 9-12% in the past 12 month, and consumer lending rates charged by banks were in the 16-20% range. So the lintah darats charges like 200% premium spread. However given that most of the micro-business owners are uneducated, they are unlikely to be able to even read and fill out a bank or government loan form.

With Kiva, individuals with Paypal account can lend these micro-business owners. Kiva lenders does not charge interest, however the local partners may charge interest to cover its operational expenses. Like banks, Kiva also makes the business owners accountable for the loan they receive. Over the course of the loan, the entrepreneurs are required to regularly update Kiva and their lenders with updates on their business through a journal. As you can see it's not as sophisticated as 10-Q's or 10-K filings, but at least it teaches accountability.

I was skeptical about the model at first. Considering that by western standards, the credit quality of these borrowers would be even beyond sub-prime by developed country standard, I expected very high default rate. So the first time I lent, I thought of it as charity. However, I was pleasantly surprised when I learned later that after over 30,000 lenders have contributed more than $2.5 million in loans, the default rate has been almost zero. Well, about 4% of the loans are behind schedule, but I still find the numbers really impressive.

I found that reading the journal can be touching at times. It is so satisfying that the $50 I lent to a small business owner 10,000 miles away is helping someone lift his or her living standard, and it cost me nothing (well the lost opportunity cost of earning interest which is insignificant).

So what are you waiting for? Start logging in to Kiva and instantly become a banker to the poor.

Telkom vs Indosat

I was kind of surprised recently when I saw the stock performance chart of Indonesian communication companies PT Telkom (NYSE:TLK) and PT Indosat (NYSE:IIT). As you can see in the chart below, in the past 2 years Telkom has been outperforming Indosat.

Growing up in Indonesia, I didn't have good image of the PT Telkom. It used to have monopoly over Indonesian fixed line telecommunication system. Like other government monopolies, it was fat, slow and bureaucratic. Until now, Indonesia had a pretty sad (plain old style) telephone penetration of only 7%. I t's not that people didn't want/need telephone or could not afford it, but it used to take months or years to get a telephone line from PT Telkom, even in big cities like Jakarta.

Indosat, on the other hand was a little more competitive animal. It was established as a foreign investment company as Indonesia's first satellite operator. It had to compete with foreign satellite operators and global telecommunication giants operating in the region for some of its services, such as international telecommunications services, including international direct dialing telephony, international data network communications, international leased lines and international television transmission services.

Indosat was Indonesia's first major cellular phone service provider, and for a while it had virtual monopoly in this segment before government started deregulating the telecommunications sector earlier this decade. In a few years, Indosat managed to sell more cell phones than Telkom's fixed line telephone installed base. It still takes a few days or weeks to get a conventional telephone service installed by PT Telkom, while it takes only a few minutes to get a cell phone. All one needs to do to get a cell phone is walk into a store, fill a form online, pay and he or she can walk away with a fully functioning phone a few minutes later. So now according to Telkom's presentation, Indonesia's cell phone penetration rate is about 20%, and there are about 3 cell phone for every 1 fixed line.

So after the government deregulated and split Telkom and Indosat completely in 2001 and let them freely whack each other at any segments, I thought Indosat would kill PT Telkom. Nobody would want to use plain old telephone anymore and everyone would snap up Indosat Cell phones like crazy. Well, Telkom was behind in the cell-phone game and their bureaucratic culture would make them move slow. well, I was dead wrong.

When they first introduced cell phones, Indosat focused on the money drenched big cities in Java and Bali, and focused on post-paid subscription based service. Well, this strategy worked pretty well in the beginning.

Telkom's cellular service, telkomsel was created to provide an illusion of competition to Indosat's service. In 2001, Indosat divested all its ownership in Telkomsel and Singapore's Singtel obtained 35% of Telkomsel and became Telkom's new mate in the cellular game.

However, in the past few years, Telkomsel has been aggressively pursuing growth throughout Indonesia, focusing on markets outside of Java and Bali. Telkomsel was the first cellular company to have coverage in all of the country's provinces. the company claimed to have reached 90% of the country's 280 million people. Telkom was utilizing their infrastructure, like using their underwater fiber optic cable to transmit data and signal between islands and using their existing switching stations real estate to place their towers. Telkomsel also used Telkom's Warung telekomunikasi (telecommunication kiosks), where people, especially in remote areas used to make phone calls, receive fax and browse the net, as its distribution channel. This way Telkomsel managed to overtake Indosat's early start, grabbing almost 60% market share in cellular segment, despite the late start. It was a little harder for Indosat to catch up, as their main asset was the satellite operation, therefore they had less local infrastructure compared to Telkom.

The cellular segment is important for both companies. Telkom's old bread and butter fixed line telephone service is being eaten away by cellular, and both companies' long distance and international services have been facing pricing pressure from disruptive technologies like VoIP. The stock market has been rewarding Telkom pretty well, mostly for the success of its cellular segment. However, it is interesting to note that both Telkom and Indosat are trading at roughly same P/E multiples (18.25), which I think is pretty good deal for both company. I think this implies that the market is not expecting one to grow faster than the other significantly in the future.

I am pretty interested to watch the development of the Indonesian telecommunication segment. In the cellular segment, it seems that intensifying competition has translated to heavy pricing pressure. While annual subscriber growth are still in double digit, Average revenue per user (ARPU) for both providers are declining by about 5% annually. Even Indosat has openly touted price cuts as part of its strategy.

I think that broadband internet will be the next big game, and Telkom has a pretty good head start in this game. Because of Indonesia's low fixed line penetration and vast geographical areas, I think most Indonesians will skip DSL and cable. Indonesia won't really have widespread broadband penetration until 3G service becomes readily available and affordable. Wireless based broadband will be the main access method for both static home and office use and for road warriors alike. It seems telkom has pretty good head start with their coverage and the fact that they own the fixed land-line business, so it can enter the DSL market too.
















Disclaimer: I and people related to me don't hold both Telkom and Indosat stocks