Saturday, April 08, 2006

The Power of Credit

Credit has the power to drive your business and improve society. It enables companies to build a loyal relationship with customers, and enables people to improve their lives now.

I'm building a small house and over the next several weeks I'll spend tens of thousands of dollars on building materials, fixtures, tools and more. Building supply companies have long recognized that it is worth extending credit to contractors and customers working on large projects because the volume of purchases is so large. My local building supply company is no exception -- they've allowed me to open an account and I'll be billed once a month for purchases. I'll also get the contractor discount. That store is within a mile of my construction site, but there are other stores around so it's in their interest to treat me right.

In The Fortune at the Bottom of the Pyramid, C.K. Prahalad wrote about CEMEX and its innovations in helping the poor build their own housing. CEMEX is the largest manufacturer and seller of cement in Mexico. The do-it-yourself construction market accounts for about 40% of cement consumption in Mexico, and CEMEX wanted more of those sales. Their "Patrimonio Hoy" (savings/property today) program offers access to credit not otherwise available to the poor by providing materials in advance. The program serves families making $5 to $15 a day.

Poor families had a difficult time saving for home construction because the little money they made would be spent on consumables. CEMEX targeted women for their new program because they manage the family expenditures and are the potential drivers of savings in Mexico.

Savings groups are formed and commit to pay CEMEX a fixed weekly payment for at least 70 weeks. Technical advisors help group members design their home and make a materials list. After 5 weeks, Patrimonio Hoy makes the first delivery of building material. The materials have a value equal to 10 weeks of payments, so credit has been extended. Later in the program, deliveries are made after only 2 weeks of payment.

CEMEX helps the Mexican society and economy by providing technical assistance and quality building materials. The credit enables the poor to build a typical room in 1.5 years instead of 4 years. After 10 years the program had 36,000 customers and over $10 million in credit.

Credit is both a powerful small business marketing tool and a way to improve society. It is so widely available in the U.S. that we might overlook its potential in the third world.