Microlending Behind the Scenes: How MFIs Judge Credit Worthiness
By Nila Uthayakumar, KF14 Uganda; Alexis Ditkowsky, KF14 South Africa; Clara Vreeken, KF 14 Bolivia; Karen Gray, KF14 Nicaragua
I’ve met all kinds of borrowers. From age 16 to 76; from orphans to a former beauty queen; from potato sellers to auto parts saleswomen to motorcycle transportation tycoons. I’ve met them in urban slums, in villages, in homes, on porches, in churches, in community centers, and outside in grassy fields. I’ve listened to their stories, I’ve photographed and filmed them, I’ve played with their children, and I’ve been welcomed into their homes. Two months into my Kiva fellowship, and I am more motivated and inspired than ever. My name is Nila and I live and work in Kampala, Uganda.
What I have understood from these borrowers is that poverty takes many shapes and forms. Poverty can mean desperation and destitution, and it can also mean having to make impossible choices between paying medical bills or school fees. It can mean not having enough food to eat today, or not having a secure enough future to be able to retire. The microloans I have seen in action place into the hands of borrowers the power to shape their own lives. The recipients of these loans are among the most dignified people I have ever met, and when given the chance, these individuals make tremendous improvements in their lives.
Collateral-free Lending to At-Risk Adolescents
The demand for microloans is incredibly high the world over. With the faces and stories of the world’s working poor being so varied and diverse, microfinance institutions must be creative with the methods by which they assess credit worthiness and offer loans, especially in order to lend to hard-to-reach demographic groups.
- ELA adolescents club group members beginning a financial literacy class. Photo by James Allman-Gulino
Last week I met with a group of teenage girls who were members of an adolescents club started by the BRAC Uganda office in their area. BRAC Uganda is one of Kiva’s partners in Uganda that makes loans to roughly 800,000 men, women, and adolescent girls in locations spanning the entire country. The adolescents clubs offer a place for teenage girls and young women to meet, make friends, and learn life skills in a supportive environment. Joining a club is also the first step that girls can take to be eligible to receive an adolescent’s loan from BRAC.
To receive a loan, a girl between the ages of 16 to 25 must join a local adolescents club (called an ELA club, which stands for Empowerment and Livelihoods for Adolescents). She pays 2,000 Ugandan Shillings (Ush) or $.83 cents for admission, and after a four week education and training program which covers topics ranging from business skills to family planning to responsibility to one’s community, she is eligible for a loan. When a girl applies for a loan, a BRAC loan officer visits her business and determines its worth and her ability to pay back a loan. Upon approval, the loan applicant will receive between 50,000 Ush (US $20.83) to 100,000 Ush (US $41.67), depending on her business. The girls who take ELA loans continue to receive support from their fellow ELA members and BRAC mentors, and over time become eligible to borrow larger sums of money.
BRAC’s strategy to make loans to this vulnerable demographic group has been highly successful, and it is one of the rare opportunities that young women with no collateral have to receive loans and grow their businesses. In fact, there is no collateral or guarantor required to receive an ELA loan. The loan is given with good faith in the borrower and her business. The best part? ELA loans have a 100% repayment rate.
Group Savings in the Solidarity Lending Model
- MCDT borrowers gathering for a group meeting in Kampala, Uganda.
Other microfinance institutions have their own methods to train borrowers and judge their credit worthiness. Prior to BRAC Uganda, I worked with another Kiva partner in Uganda: Microcredit for Development and Transformation (MCDT). A new loan applicant at MCDT is required to complete a business skills training course, and then join a solidarity lending group within her neighborhood. At that point, the loan applicant starts making deposits into a group savings fund, and when her contribution to the fund totals 50,000 Ush (US $20.83) she is eligible for a loan of 100,000 Ush (US $41.67).
When a borrower completes repaying her loan and submits an application to borrow again, all the loan officers sit together and assess her application. They discuss the borrower’s repayment record and consider if the borrower has put a strain on the rest of the solidarity group members. After looking at the borrower’s history, they may give her a step up on the loan (200,000 Ush or $83.34). Each time the borrower applies, she may be eligible for a a higher loan amount, depending on her repayment record. Some MCDT borrowers borrow as much as 2 million Ush (US $831.95).
In MCDT’s model, the group savings fund and the group members create the collateral, should a borrower default. In addition, a borrower’s ability to save is used as an indicator of creditworthiness. Varying solidarity group lending methods are used around the world to reach very poor borrowers. From South Africa, Alexis Ditkowsky details the lending process at Women’s Development Business.
The Group as Collateral
By Alexis Ditkowsky, KF14, South Africa
- Staff from WDB’s Eshowe branch prepare to quiz a new solidarity group about policies and procedures before allowing them to take out their first loan. Photo by Alexis Ditkowsky
The approach of Women’s Development Businesses is very straightforward – they target poor and very poor rural South African women with their microcredit services. Only women in groups of five can take out loans and all loans must be used in support of an income-generating activity.
WDB’s due diligence focuses on ensuring the solidarity of a potential group by asking them questions in the initial interview about their member selection process (the group should be self-selected), their goals, their plans for managing the group (including delinquencies), and if they understand the role of the group as collateral to their WDB loan. In addition to satisfactorily answering these questions, group members must also come from the same village and remain in the same area during the loan term to attend required meetings.
Next up: Orientation. This process lasts several days and provides more in-depth information on WDB’s policies, the responsibilities of the group, the loan application and repayment procedures, and principles for improving their businesses. Once the loan officer thinks the group members are ready, the branch manager conducts a Final Group Evaluation to confirm their understanding of everything they’ve learned in the past few weeks. After that, the group can sign up for their very first loan.
This process may sound arduous and time-consuming but as in the Grameen model, the group IS the collateral. Without a solid group foundation, WDB can’t count on social pressure and community ties to encourage repayment. Plus, with a target of poor and very poor women, WDB doesn’t want to be in the business of taking property or assets from families who are already struggling.
For photos from a Final Group Evaluation and borrower meeting, check out Photos from Kwa-Zulu Natal, South Africa. And click below to watch a short video of the opening hymn at that same meeting.
The methods used for lending to groups differ from those used to lend to individuals. Many MFIs use individual loans to target entrepreneurs from a slightly higher economic group. Correspondingly, the loan amounts for individual borrowers are often higher than those of solidarity group borrowers, and often require a guarantor. From Bolivia, Clara Vreeken explains the processes that MFIs use to lend to individual borrowers.
Using Economic and Social Evaluations in Individual Lending
By Clara Vreeken, KF 14, Bolivia
In Bolivia I am working with two microfinance institutions that lend to individuals: IMPRO and Emprender. These two MFIs manage the risk of individual loans firstly, by asking for guarantors. This guarantor should be a person who owns a house. Secondly, IMPRO and Emprender make loans to borrowers without collateral through agreements with unions and associations. Emprender has a settlement with a transport union in Santa Cruz, and IMPRO with a milk producer association near La Paz. Clients do not need a guarantor for their loan, but just need to get permission from their union or association.
Before lending, the loan officers of these institutions visit the borrowers at home to verify and list their possessions (television, dvd player, refrigerator, etc.). They also analyze how much the entrepreneur earns and what costs he or she has, as well as factor in whether the borrower has taken loans from other institutions. With this information the loan officers calculate how much money will be left every month to repay the loan. Neither microfinance institution lends more than the clients can afford.
In addition to the economic evaluation, IMPRO also performs a social evaluation of every borrower. The loan officers ask questions about the borrower’s education, whether his or her children go to school, and whether he or she has insurance. They also ask specific questions about the borrower’s home; for example, whether he or she owns or rents, if the house is made of clay or bricks, the number rooms in the house, if there is power and water, and so on. In the end, the loan officer judges the client’s economic status. When the borrower is very poor IMPRO provides the loan with a lower interest rate.
Some MFIs take the process of verifying creditworthiness even further. Although similar to the methods employed in Bolivia by IMPRO and Emprender, Karen Gray explains how her MFI adds to the process by using formal credit checks, personal references, and detailed inventories.
Credit Bureaus, References, and Inventories in Individual Lending
By Karen Gray, KF 14, Nicaragua
I recently joined a credit officer from MíCrédito in Nicaragua, on a loan application visit. The potential borrower was Kelly. She owns a shop in the town of Estelí and she sells essential items and tortillas. Kelly had applied for a $500 loan to buy basic inventory such as rice, sugar, and cooking oil to sell in her shop, as well as gas for cooking.
To be considered for a loan at MíCrédito:
The borrower must have:
1. A national identification card
2. A guarantor
4. Been in their business for at least a year
In the next step in the loan process, every borrower is checked against a credit bureau, either TransUnion or SinRiesgo, for outstanding debt. Each loan guarantor is also checked for debt. Then, the credit officer visits the borrower to collect information and make a very detailed list of all assets. The borrower is also asked to provide three names of neighbors who will serve as personal references.
In the case of Kelly, we counted all the goods in her shop, including the exact number of bags of sugar of the shelf, number of soup packets, and number of tortillas for sale at that moment. We also recorded the cost of these goods to Kelly, versus the retail price of the goods. After that, we wrote down the serial numbers of Kelly’s refrigerator and TV, and we noted the pieces of furniture she owned: a table and chairs, and a shop display case.
In addition to the thorough inventory, the credit officer inquired in detail about monthly sales and purchases in Kelly’s shop, as well as the cost of utilities. The credit officer also asked about the employment and financial status of her spouse. In the end, the credit officer did a simple calculation: earnings minus costs, to determine if the client can make the monthly loan payment. Finally, the information collected was reviewed by the Estelí branch manager of MiCredito, before the loan was approved.
The result of this long process was that Kelly was posted on the Kiva website as a borrower and received her $500 loan.
What we can gather from the methods of these MFIs is that making loans to the world’s working poor involves much more than just the transfer of cash. Borrowers are not homogeneous and varying lending methods and credit worthiness assessments are required to reach diverse populations with differing needs. Kiva relies on its field partners for their on-the-ground expertise and know-how and without them Kiva loans wouldn’t be possible!
Check out Nila’s other blog posts:
Note: This post was written approximately a month ago and Nila has since started her second KF15 placement in Kenya. She is currently serving as a roaming fellow based in Nairobi, Kenya, working with Kiva partners Juhudi Kilimo and Faulu.