Loans and Lending Procedures

One of the most important tasks for a financial institution is to manage its loan portfolio adequately. The loan portfolio is usually the largest asset of a financial institution and, therefore, its main revenue generating asset, so ensuring accurate and timely reporting of the portfolio quality is crucial for competent management. In simple terms this means finding out if the institution is recovering the money it lends. There is a great diversity of ratios used to measure loan recovery and delinquency and it is important to understand how to choose and use them. In particular a monitoring system is needed that highlights repayment problems clearly and quickly, so that loan officers and their supervisors can do something before it gets out of hand.

Library Resources

resource title type year resource
A Digital Credit Revolution: Insights from Borrowers in Kenya and Tanzania Paper 2018

view page
This resource appears in: Loans and Lending Procedures

Since digital credit products launched in East Africa—first in Kenya and later in Tanzania—members of the financial inclusion community have alternately voiced optimism and concern about how the market is evolving and its potential effects on the lives of poor people. To identify who is using digital credit, the purposes for which it is used, and the risks borrowers experience, CGAP, FSD Kenya, and FSD Tanzania undertook the first large-scale surveys dedicated to these topics. 

The surveys, which included more than 3,000 Kenyans and 4,500 Tanzanians, revealed that more than a third of mobile phone owners in Kenya and a fifth in Tanzania have used digital credit—indicating use has spread quickly. These digital borrowers tend to be young, urban, men. And they borrow actively—more than half of digital borrowers in each country had a digital loan outstanding at the time of the survey.

Digital loans are primarily used for household purposes, followed by business purposes and, in Tanzania, airtime purchases. They are only rarely used for medical needs or emergencies (less than 10 percent of digital borrowers in each country) or any other type of emergency (less than 2 percent in each country).

The surveys indicate some reasons for concern. About half of digital borrowers in each country reported having repaid a loan late at some point. In Tanzania, 31 percent reported having defaulted, as did 12 percent in Kenya. Twenty percent of digital borrowers in Kenya and 9 percent in Tanzania reported reducing food purchases to repay a loan. And a significant minority in each market reported poor transparency—such as not understanding the loan costs or terms—which correlates with higher levels of late repayment and default.

The surveys suggest areas of consideration for providers, policy makers, investors, and donors to ensure responsible market development which maximizes benefits and minimizes risks to consumers. Providers can enable customers with strong repayment history to graduate to larger, longer-term, lower-cost loans that can be used for more productive purposes. Regulators need monitoring mechanisms for transparency and consumer protection and may need to update credit reporting requirements to adequately capture the speed of digital loans. Investors can guide their investees toward responsible conduct, while donors should support market facilitators and regulators to develop regulatory and supervisory frameworks that adequately address existing and emerging risks.
 

Author Michelle Kaffenberger and Edoardo Totolo, with Matthew Soursourian
Number of Pages 46 pp.
Primary Language English (en)
Region / Country Africa
Kenya, Tanzania
Keywords Access To Credit. loans
Related Resources
Bridging the Small Business Credit Gap through Innovative Lending Paper 2016 English (en)

view page
This resource appears in: Loans and Lending Procedures

Document's key points:

  • Accion Venture Lab has invested in more than a dozen innovative lenders that are using new business models to make financing available to micro, small and medium enterprises that have long struggled to borrow from traditional institutions.
  • These new approaches leverage recent developments that have reduced some of the hurdles to viably lending to small business, specifically the emerging digitization of small business practices – such as government-mandated e-invoicing – as well as the growth of online finance and mobile money platforms.
  • Access to alternative data flows from these electronic sources and new analytic tools are smoothing the due diligence process and speeding loan approvals.
  • By unbundling the suite of financial services usually found at banks and using niche and affinity marketing approaches, these pioneering lenders have unlocked new ways to identify, assess, serve, and support small business clients.
  • Taken together, these trends present a new opening to close the large finance gap facing small businesses and many actors can play a role: investors, regulators, microfinance institutions, entrepreneurs and other startups.
Bridging the Small Business Credit Gap through Innovative Lending  -  English (en)

Loan Protection for Maize Farmers in Burkina Faso Brief 2015

view page
This resource appears in: Loans and Lending Procedures

The MicroInsurance Centre’s Microinsurance Learning and Knowledge (MILK) Team studied drought-related costs and financing for maize farmers in Dedougou, Burkina Faso, focusing on farmers' highly variable cash flow and the role that Allianz’s maize loan protection insurance product played in coping with a drought.

Key findings include:

  • Though most farmers have diversified their income, farmers rely on agricultural revenue to invest in other income streams and are unable to utilize diverse strategies when yields are low. Hence, drought insurance is important to them;
  • Many insured respondents did not fully understand the insurance product, and insured farmers may have limited their ex-ante risk mitigation behavior as they expected more from the product;
  • Relatively low levels of loan coverage compared to a high loan amount due in one large bullet payment reduces the potential value of the insurance by limiting its impact on loan payment relief.
Author Barbara Magnoni and Danielle Sobol
Publisher MicroInsurance Centre
Number of Pages 13 pp.
Primary Language English (en)
Region / Country Africa
Burkina Faso
Keywords Loan Analysis
Related Resources
Screening Peers Softly: Inferring the Quality of Small Borrowers Paper 2014

view page
This resource appears in: Loans and Lending Procedures

This paper examines the performance of new online lending markets that rely on non-expert individuals to screen their peers’ creditworthiness. We find that these peer lenders predict an individual’s likelihood of defaulting on a loan with 45% greater accuracy than the borrower’s exact credit score (unobserved by the lenders). Moreover, peer lenders achieve 87% of the predictive power of an econometrician who observes all standard financial information about borrowers. Screening through soft or nonstandard information is relatively more important when evaluating lower quality borrowers. Our results highlight how aggregating over the views of peers and leveraging nonstandard information can enhance lending efficiency.

Author Rajkamal Iyer, Asim Ijaz Khwaja, Erzo F.P. Luttmer, Kelly Shue
Publisher Center for International Development, Harvard University
Cambridge, MA; USA
Number of Pages 46 pp.
Primary Language English (en)
Region / Country Global
Keywords Crowd-sourcing, market based lending, Credit Markets
Related Resources
The Lending to the Agriculture Sector Toolkit Toolkit 2012

view page
This resource appears in: Loans and Lending Procedures

The Lending to the Agriculture Sector Toolkit is a suite of resources designed to support financial institutions (FIs) in: (i) making a determination whether or not to get into or ramp up agricultural sector lending; (ii) and if so, to rapidly set-up an agricultural lending unit. It was originally designed by the U.S. Agency for International Development (USAID) to increase access to agriculture finance in the sub-Saharan Africa where access to agriculture finance is a particular challenge1, but has universal applicability. The underlying premise is that FIs will not get into areas of specialized lending areas unless and until they believe that they can do so profitably and sustainably.The toolkit therefore aims reduce risks and transaction costs by promoting “a standardization of lending processes and a move toward international best practices for agricultural lending.” It includes a comprehensive collection of product sheets, policies, templates, tools, manuals, and guidelines for FIs on how to increase agricultural lending in a sustainable manner. The toolkit consists of three main sections: research and planning, credit product development, and implementation.

Author USAID
Publisher USAID
Primary Language English (en)
Region / Country Global
Related Resources
Réglementation de la protection des consommateurs dans les environnements à faible accès : opportunités de promotion de la finance responsable Report 2010

view page
This resource appears in: Loans and Lending Procedures

Les questions de protection des consommateurs actuellement débattues et les solutions proposées sont-elles pertinentes pour les pays en développement, ou les marchés, produits, prestataires et consommateurs sont-ils trop différents ?

La présente Note Focus cherche à répondre à cette question, en s’appuyant sur divers diagnostics de protection des consommateurs élaborés par le CGAP dans plus d’une dizaine de pays.

Ce rapport s'appuie également sur des consultations organisées auprès de représentants d’organes de réglementation partout dans le monde, sur l’analyse de travaux de recherche et d’expériences menés dans des pays développés et en développement, et sur les résultats d'enquête sur l'inclusion financière.

Author CGAP
Publisher CGAP
Washington, USA
Number of Pages 36 pp.
Volume / Issue# Vol. 60
Primary Language English (en)
Region / Country Global
Related Resources
Agricultural Production Lending: A Toolkit for Loan Officers and Loan Portfolio Managers Toolkit 2010

view page
This resource appears in: Loans and Lending Procedures

This toolkit is designed as a guidebook and training resource for agricultural lending institutions around the globe. It is not country or institution specific but rather highlights the common principles of sound agricultural lending practices. It is intended for use by trainers or as self-study material. The practical approach of the toolkit is enhanced by the use of an imaginary institution to illustrate important steps of the loan cycle and loan portfolio management and the client perspective is represented by an imaginary farm household.

The first chapter of the toolkit provides an overview of different approaches to agricultural lending and how they have changed in recent years. The risks and costs of agricultural lending are explored as well as different types of agricultural loans.

The second chapter outlines the basic features of agricultural lending. It emphasises the need to understand agricultural markets, the loan cycle and the importance of loan officers for successfully lending to the agricultural sector.

The third chapter concentrates on the loan officer. The knowledge gained during the on-site appraisal of applications by loan officers is the key to success in agricultural lending. Techniques outlined in the chapter include field visits, cashflow analysis, assessment of character, balance sheets and collateral, loan decisions, disbursement and monitoring.

The fourth chapter addresses basic loan portfolio management issues. The toolkit contains questions and exercises throughout and is illustrated where appropriate by real life case studies.

Author Becerra, N.; Fiebig, M.; Wisniwski, S.
Primary Language English (en)
Region / Country Global
Related Resources
Rice inventory credit in Madagascar : conditions of access and diversity of rationales around an hybrid financial and marketing service Case Study 2009

view page
This resource appears in: Loans and Lending Procedures

The Malagasy rural finance network CECAM has been offering an innovative individual rice inventory credit to its members since 1993. Starting from the acknowledgement that the inventory credit is a hybrid product, which involves a mix of in kind and in cash flows and stocks, a mix of credit and savings features, and linkages with the local rice market, this papers sets out to inquire how it is accessed, used, and inserted in the strategies of different wealth categories of Cecam members.

This research conducted by E. Bouquet, B. Wampfler et E. Ralison is based on an analysis of quantitative and qualitative data that were collected in several phases during a 4 year impact study conducted by the authors from 2003 to 2007.

Evidence suggests that the Cecam inventory credit is globally well suited to the differentiated needs of poor as well as nonpoor households, because it lowers the access thresholds, it enhances the value of their rice production (be it for consumption or sale) and it allows them to pursue different kinds of strategies (more food security oriented for the poor, more entrepreneurial and diversification oriented for the non poor).

Author Bouquet, E.; Wampfler, B.; Ralison, E.
Number of Pages 24 pp.
Volume / Issue# WP 6
Primary Language English (en)
Region / Country Global
Madagascar
Related Resources
Can the Poor Afford Microcredit? Technical Note 2008

view page
This resource appears in: Loans and Lending Procedures

The microfinance movement rests largely on one basic assertion: that poor households have high economic returns to capital.1 Even a small bit of extra cash, it is argued, can transform money-starved, micro-scale businesses. The challenge for microlenders has been to figure out how to provide banking services in an efficient, long-term way.

The assumption of high returns to capital in poor communities justifies the expectation that, if it can be delivered, microfinance will bring critical social and economic impacts. The assumption also undergirds arguments that poor households can pay high interest rates—rates that are high enough to allow microlenders to sustain themselves without donor help.An expectation of high returns to capital is thus at the heart of both the social and economic logic of microfinance. So it may be surprising that we in fact have very little direct evidence on the returns to capital of the poor. Indirect evidence, yes, but very little systematic, direct data on how access to capital translates into extra profits for “micro-entrepreneurs.”

This note describes what new research in Mexico, Sri Lanka, and Indonesia shows, identifies its limits, and describes what we need to know to resolve ongoing debates. Based on the evidence so far, the big debates are still far from being resolved. The evidence suggests that the poor are a diverse group. The question so far has been posed as whether or not the very poor can truly benefit from microcredit. A better question is: how many and to what degree?

Author Jonathan Morduch
Number of Pages 7 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Performance Indicators for Microinsurance Article 2008

view page
This resource appears in: Loans and Lending Procedures

Microinsurance is regarded by some as a risk management mechanism that the poor can use to compensate for the lack of appropriate state-sponsored social protection programmes. Alternatively, it is viewed by others as an opportunity to provide financial services to the low-income market at a profit.

This handbook is structured in four chapters:

  1. Measuring Performance in Microinsurance describes nine principles and ten key indicators.
  2. Measuring Performance: Interpretation Issues focuses on some of the special considerations to be given in evaluating performance for certain products and for the partner-agent model.
  3. Benchmarking introduces the subject of benchmarking.
  4. explores the topic ofSocial Performance.
Author Denis Garand and John Wipf
Publisher ADA, BRS and the CGAP
Number of Pages 62 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Expérience de commercialisation de produits agricoles par le mécanisme du warrantage au sein de la fédération Sa'a Article 2007

view page
This resource appears in: Loans and Lending Procedures

Le souchet est une culture de rente de plus en plus importante au Niger, et en particulier dans le département de Maradi. Cependant, les débouchés sont rares, et l’approvisionnement en engrais de cette culture exigeante soumise aux irrégularités de la centrale d’achat de l’État.

Le but de la fédération Sa’a est de regrouper les commandes d’intrants pour jouer sur les prix et la qualité. Le warrantage, crédit de quelques mois dont la garantie est un stock de produits vivriers ou de rente, est un moyen de permettre aux producteurs d’honorer leur commande d’intrants groupée. Le stock est échangé contre des engrais. Les activités génératrices de revenus sont promues pour faciliter le remboursement. La vente groupée permet d’accroître encore le gain et de le sécuriser. Les producteurs sont plus enclins à miser sur le progrès techniques, ils disposent de trésorerie pour la campagne et d’engrais.

La fédération est structurée à tous les niveaux (Union et OP de base), chaque niveau possède une tâche bien définie d’encadrement (observation des prix, conseil technique, responsabilité sur la mise en stock, sur le contrôle, sur le remboursement).

Le stockage comporte de nombreuses étapes : i) sensibilisation des producteurs ; ii) formation des responsables ; iii) identification des magasins ; iv) constitution des stocks ; v) identification des activités génératrices de revenus ; vi) contrat ; vii) suivi des stocks et des marchés ; viii) recherche de débouchés ; ix) remboursement ; x) bilan.

L’organisation paysanne est très investie. La Fédération ajuste petit à petit son processus au fur et à mesure des obstacles rencontrés : maîtrise des risques suite aux importations de mil et au stockage tardif, changement d’institution de microfinance suite au coût de l’intérêt et au manque de capacité de financement, règlement intérieur suite à une libération de stock avant remboursement, etc. Sa’a a mis en place un système de prélèvement sur le crédit pour contribuer aux frais d’encadrement.

Les magasins manquent, les capacité s de financement aussi, l’expérience et le réseau de partenaires se construisent, mais les résultats sont très encourageants. Le dispositif doit maintenant changer d’échelle, la question fondamentale étant la capacité de l’OP à assumer toutes les fonctions qu’elle s’est assignées.

Author Garba Barthe A.
Publisher Inter réseaux Développement rural, CTA
Paris, France
Number of Pages 18 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Lending to Agribusinesses in Zambia Paper 2007

view page
This resource appears in: Loans and Lending Procedures

Microfinance has been celebrated in the last decade as a new paradigm shift in lending that has achieved immense success in improving the living standards of the poor through the provision of financial services. Institutions involved in microfinance around the world have used innovative loan contract mechanisms to profitably lend to the poor and achieve very high repayment rates while allowing the borrowers to profit and grow their enterprises. While high repayment rates have been realized by microfinance institutions focused on lending to consumers and to retail type micro enterprises, few microfinance institutions focused on lending to agricultural producers have achieved comparable success. This article compares the mechanisms employed by major microfinance institutions with a successful lending institution in Zambia that serves agricultural businesses. Findings are: ZATAC uses progressive lending and group lending contracts adapted in some ways to suit seasonal agricultural production credit requirements. The institution also uses various forms of collateral substitutes like other microfinance institutions. We also find that ZATAC uses other mechanisms such as automatic loan repayments tied to production, cooperative sanctions, contracted production and provision of business development services that eventually improve loan repayments significantly and enable the lender to lower interest rates.

Author Brian Mwanamambo, Victoria Salin and Likando Mukumbuta
Number of Pages 36 pp.
Primary Language English (en)
Region / Country Global
Zambia
Related Resources
Shift in strategy Article 2007

view page
This resource appears in: Loans and Lending Procedures

Sometimes, a shift in strategy in microfinance approach has led to innovative ways of deepening outreach. This has been noted from listening keenly to the beneficiaries!

Author Amos Mate
Number of Pages 6 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Do Small Farmers Borrow Less when the Lending rate Increases? The Case of Rice Farming in the Philippines Study Guide 2007

view page
This resource appears in: Loans and Lending Procedures

The new generation of credit programs directed at small borrowers emphasizes financial sustainability. Based on anecdotal information (especially from microfinance experiences), proponents of cost recovery claim that raising formal lending rates would have a minimal impact on borrowing. Rigorous evidence for this conjecture is however sparse. This study conducts an econometric test of this conjecture using data from a survey of small rice farmers from the Philippines. Alternative regression techniques tend to reject the conjecture; in particular, a regression that controls for selection effects shows a unitary elastic response of formal borrowing to the lending rate.

The paper is organized as follows: Section 1 is introduction to the study. Section 2 provides additional background and related studies. Section 3 develops the theoretical framework and econometric model. Section 4 presents the survey frame and data analysis. Section 5 concludes.

Author Roehlano Briones
Number of Pages 29 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Providing Cost-Effective Credit to Small-Scale Single-Crop Farmers: The Case of Financiera El Comercio Paper 2006

view page
This resource appears in: Loans and Lending Procedures

This paper sets out the challenge of finding appropriate mechanisms to finance single-crop farmers in Paraguay. It begins by highlighting that single-crop farmers have traditionally been unable to access credit through formal financial institutions. The vast majority of financial institutions find such farmers too risky or too costly to serve. For this reason, many such farmers find that they can only receive credit from those businesses with whom they regularly buy from and sell to, i.e. traders, processors, suppliers, storage facilities and exporters in the same value chain.

This InSight discusses the case of Financiera El Comercio, a regulated microfinance institution in Paraguay. El Comercio has implemented a partnership with silos that enables it to provide small loans to single crop soybean farmers despite their high risk profile. It considers why and how El Comercio entered this market, and the necessary conditions for this type of credit. Finally, the paper discusses lessons learned from this type of credit and other successful models of financing small farmers.

The conclusion states that financing of single crop farmers requires specific conditions for a successful outcome, such as the existence of a strong value chain, a strategic alliance with an important member of the value chain, and favourable geographic, climate, and price conditions. When these conditions exist, the participation of the financial institution makes it possible for these small-scale single-crop farmers to enter the formal sector and access credit.

Author Wittlinger, B. y Mori, T.
Publisher ACCION
Number of Pages 14 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Myth and Reality of Agricultural Micro-Lending – Experiences from a Commercial Bank in Georgia Paper 2006

view page
This resource appears in: Loans and Lending Procedures

The majority of the international microfinance community holds a strong belief that agricultural micro-lending cannot be profitable due to higher risks and costs when compared to urban micro-lending. The experience of the United Georgian Bank indicates the opposite: agricultural micro-loans can be very profitable, even for a commercial bank.

The United Georgian Bank (UGB) is one of the largest commercial banks in Georgia, established in 1995 as a result of a merger of three former state-owned banks: Savings Bank, Eximbank and Industrial Bank. UGB started micro-lending in 2003 and decided to pilot agricultural lending in 2004. At first experience was mixed but the situation changed dramatically in 2006 following a study tour to the Agriculture Cooperative Bank of Armenia. By the end of October 2006, agricultural loans made up 8.9% of all micro-loans and 4.1% of the entire portfolio value. Although still small, the share of agricultural loans is growing fast. Productivity has increased tremendously and loan officers are keen to lend to farmers. What is the recipe for this success?

One key was staff motivation and empowerment. At first it was difficult to motivate branch managers, micro-loan unit managers and loan officers to whole-heartedly engage themselves in agricultural lending. Branch managers had to organise transport for the loan officers and the loan officers had to spend much time travelling to the villages. On top of that they had to deal with a completely new type of customers which also meant that they had to get their hands and feet dirty during site inspections. Not surprisingly, there was initial resistance. The bank responded by introducing an agricultural lending bonus scheme which paid higher incentives for each loan disbursed but this was soon brought in line with the normal bonus scheme. Far more impact on staff motivation, however, was achieved by head office managers going into the villages together with loan officers, coaching them on the job. To see their bosses getting their hands and feet dirty made a big impression on the loan officers and unit managers. It became very clear that head office is serious about agricultural lending.

A second key was careful product design. The loan structuring is flexible in terms of disbursement and repayment, based on a cash flow analysis which considers all incomes and expenses of the household. Since harvesting and sales of produce differ from case to case and depend on the current market prices, the bank is offering "generous" repayment schedules with rather long duration. At the same time, the bank abolished prepayment fees for agricultural loans in order to encourage farmers to pay back their loans as early as possible, for example if they sell their produce earlier than originally expected.

The third important success factor was adopting a cluster approach for handling rural clients. The basic idea of the cluster approach is simple. The bank selects larger villages with good agriculture potential and talks to the responsible village headman, a political administrator elected by the people, about the loan scheme. Then the village headman spreads the word in the village and organizes a farmer meeting in the village hall. The meetings must be held at times when farmers are free from other obligations. In these meetings loan officers and unit managers inform the farmers about UGB’s agricultural loan products and interview applicants on the spot. In many cases the farm inspection can also be done the same day. The advantages of this approach continue right through the credit cycle - better information about clients, streamlined disbursement and repayment, easier monitoring, etc.

This short paper provides a most encouraging example for any institution aiming to increase its agricultural lending portfolio.

Author Dr. Karin Derflinger, Oleg Ivaniychuk, Helmut Grossmann
Number of Pages 10 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Innovative Approaches for Improving Access to Agricultural Lending: The Use of Price and Weather Risk Management Instruments Document 2006

view page
This resource appears in: Loans and Lending Procedures

The presentation includes :

  • The impact of risk
  • Price risk management instruments
  • Case study: Tanzania coffee
  • Outcomes for Coop
  • Index based weather insurance
  • Case study: Moroccan grains
  • Other innovations
Author Bryla, E.; Dana, J.; Hess, U.; Varangis, P.;
Primary Language English (en)
Region / Country Global
Related Resources
Group versus Individual Liability: A Field Experiment from the Philippines Paper 2006

view page
This resource appears in: Loans and Lending Procedures

Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group lending claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor and enforce each other’s loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender’s overall profitability and the poor’s access to financial markets. This study worked with a bank in the Philippines to conduct a field experiment to examine these issues. The study randomly assigned half of the 169 pre-existing group liability “centers” of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control).

Although the study finds evidence of the oversight mechanisms that group lending is supposed to create amongst borrowers, it does not find that these mechanisms add up in any meaningful way economically. In fact, it finds that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in center size by attracting new clients.

The paper is organized as follows. Section I contains an introduction to the study. Section II reviews the literature on group versus individual liability lending programs. Section III presents the experimental design and the administrative and survey data collected. Section IV presents the empirical strategy and primary results on the impact of group versus individual lending on centre and individual performance. Then, section V presents results from three surveys conducted one year after the initial conversion in order to learn more about the mechanism through which changes did or did not occur. Section VI concludes. There are also a number of tables and appendices attached to the study which present the data collected.

Author Giné, Xavier; Karlan, Dean
Publisher Economic Growth Center
Number of Pages 39 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Microfinance and Renewable Energy – Investing in a Sustainable Future Paper 2006

view page
This resource appears in: Loans and Lending Procedures

WISIONS is an initiative of the Wuppertal Institute for Climate, Environment and Energy, carried out with the support of the Swiss-based foundation Pro-Evolution, to foster practical and sustainable energy products. WISIONS aims to promote good practice in resource efficiency through its publication of relevant successful projects in its Promotion of Resource Efficiency Projects: PREP. It also provides consulting and support to ensure the potential seen in visions of renewable energy and energy efficiency can become mature projects through its Sustainable Energy Project Support: SEPS.

This WISIONS brochure focuses on the microfinance of renewable energy systems. It notes that whilst improved energy services do have many quality of life benefits, the productive use of electricity can also help reduce poverty – leading to increased profitability and productivity for micro, small and medium enterprises, and cottage industries.

It highlights further that the remoteness of rural locations usually makes an expansion of the electricity supply in those areas through centralised grid system difficult; therefore people not connected to the grid often rely on expensive fossil fuels such as diesel and kerosene. In remote areas, people often do not have the financial means to afford renewable energy.

In this brochure, WISIONS presents projects from Peru, South Africa, China and Nepal that have been successfully implemented, with the intention of further promoting the particular approaches used by these projects. Using a key number of internationally accepted criteria, the main consideration for the selection of the microfinance projects was the inclusion of renewable energy technologies like solar/photovoltaic systems, wind energy and hydropower biogas used for cooking lighting, power telecommunications equipment, radio, television, household electrification, health clinics, water pumping, milling and grinding, water disinfection, fencing, computer education, machinery operation, etc. in households or businesses.

Author WISIONS
Publisher WISIONS
Number of Pages 12 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Microfinance Games Paper 2006

view page
This resource appears in: Loans and Lending Procedures

The paper begins by highlighting the well-versed difficulties of banking in low-income communities – banks typically have limited information about their customers and often find it costly or impossible to enforce loan contracts and customers, for their part, frequently lack adequate collateral or credit histories with commercial banks. Moral hazard and adverse selection coupled with small transaction sizes, together limit the possibilities for banks to lend profitably. Yet, as the paper also notes, microfinance practitioners have been finding workable mechanisms through which to make small, uncollateralized loans to poorer customers.

Many of these mechanisms rely on groups of borrowers to jointly monitor and enforce contracts themselves. However, the authors of the paper suggest that group-based mechanisms tend to be vulnerable to free-riding and collusion. As they point out, inefficiencies are well-known to emerge in similar contexts: examples are documented in the literatures on public goods, the tragedy of the commons, insurance, and environmental externalities.

As such, the authors created an experimental economics laboratory in a large, urban market in Lima, Peru, and conducted 11 different games which allowed them to unpack microfinance mechanisms in a systematic way. This paper walks through the games that were undertaken and sets out the findings. The simulated microfinance transactions involved players choosing hypothetical risky investments, receiving loans, and managing the risk of default. The authors point out that by working in Lima and designing the games to replicate actual microfinance scenarios, their aim was to understand the logic of the mechanisms with individuals likely to participate in an actual microfinance program, but not to replicate exactly customers’ experience with microfinance.

The paper shows that the tendency toward free-riding also emerges in experimental settings that simulate microfinance transactions: moral hazard is exacerbated by simple group-based microfinance contracts. However, it shows that moral hazard is allayed by allowing customers to form their own groups voluntarily. Moreover, the mutual insurance induced by joint liability can allow borrowers to invest in profitable risky projects without reducing overall repayment rates. Given endogenous group formation, microfinance contracts do function effectively to reduce moral hazard and facilitate profitable risk-taking. The authors find that in the most “true-to-life” game, participants tend, in fact, to take too little risk relative to the optimum. The finding is consistent with a strong role for social factors in group settings. Furthermore, they find in particular that participants who have a propensity to take risks tend to reduce their risk-taking when their partners act more safely. The result is consistent with altruism or fairness, rather than profit maximization.

Following the introduction, section 2 of the papers discusses microfinance mechanisms that motivate the experiments. Section 3 then outlines the competing roles of ex ante moral hazard and mutual insurance that are at the heart of the study. Section 4 describes the lab setting and participant pool and section 5 presents the theoretical predictions and initial data that relate contract structure to individual choices. Section 6 then presents the main empirical results before section 7 concludes.

Author Giné, X, Jakiela, P, Karlan, D and Morduch, J
Publisher The World Bank
Number of Pages 46 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates? Evidence from Field Experiments in Vietnam Paper 2006

view page
This resource appears in: Loans and Lending Procedures

Microfinance institutions employ various kinds of incentive schemes for repayment but estimating the effect of each scheme is not easy due to endogeneity bias. The Southeast Asian Studies Group II at IDE conducted field experiments in Vietnam to assess the role of joint liability, monitoring, cross-reporting, social sanctions, communication and group formation in borrowers’ repayment behavior.

They found that joint liability contracts cause serious free-riding problems, inducing strategic default and lowering repayment rates. When group members observe each others’ investment returns, participants are more likely to choose strategic default. Even after introducing a cross-reporting system and/or penalties among borrowers, the default rates and the ratios of participants who chose strategic default under joint liability are still higher than those under individual lending. The researchers also found that joint liability lending often failed to induce mutual insurance among borrowers. Those who had been helped or who had repaid a little in the previous round were more likely to default strategically and repay a little again in the current round and those who paid large amounts were always the same individuals.

This paper reports on a piece of academic research and is not so easy for a practitioner to follow. However, the topic is interesting and teh conclusions provide food for thought for institutions using a mutual guarantee system.

Author Kono, H.
Publisher Institute of Developing Economies (IDE)
Number of Pages 39 pp.
Primary Language English (en)
Region / Country Global
Related Resources
A handbook for developing credit scoring systems in a microfinance context Guideline 2006

view page
This resource appears in: Loans and Lending Procedures

This handbook is meant to be a guide for banks, microfinance institutions (MFIs) and donors who are considering applying credit scoring as part of their business model. The research team drew on the experience of microlenders from three continents to devise a four-step framework for designing and implementing custom credit scorecards. The framework is flexible, does not advocate any one rigid methodology or technology, and is thus appropriate to any organization with a clear strategy and some experience lending to its target market.

Credit scoring systems help to:

  • Streamline the lending process;
  • Improve loan officer efficiency;
  • Increase the consistency of the evaluation process;
  • Reduce human bias in the lending decision;
  • Enable the bank to vary the credit policy according to risk classification, such as underwriting or monitoring some lower risk loans without on-site business inspections;
  • Better quantify expected losses for different risk classes of borrowers; and
  • Reduce time spent on collections.

One conceptual difficulty with embracing credit scoring for microfinance is that a data-driven business approach does not intuitively seem like a good fit for reaching data-poor clients who have been typically excluded by banks. In the light of such limitations, thoughtful innovation is required to identify meaningful risk factors for microfinance clients and to measure them in terms of characteristics that are feasible to collect.

Developing scorecards appropriate to microfinance requires a combination of technical modelling skills and practical knowledge of the credit risks associated with borrowers in the micro segment. Banks and MFIs often lack the technical expertise in-house, but it can be purchased for varying costs from large international credit bureau operators and a wide range of consultancies. However, practical knowledge of the credit risks associated with micro-borrowers should come at least partially from the microfinance organization itself.

After setting out the background and scope of the research, this handbook goes on to give an overview of the banks and MFIs that were included in the study. Detailed information about each can be found in the appendices. The main part of the book contains guidelines on how to apply credit scoring in a microfinance context. It is a very useful document for any institution interested in this technique for enhancing loan appraisal.

Author Caire, D.; Barton, S.; de Zubiria, A.; Alexiev, Z.; Dyer, J.; Bundred, F.; Brislin, N.
Publisher USAID
Number of Pages 79 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Introducing Individual Lending Document 2006

view page
This resource appears in: Loans and Lending Procedures

This document aims to provide microfinance institutions (MFIs) that currently provides loans to groups of clients with a detailed understanding of how to introduce lending to individual clients. The manual is designed to support MFIs wishing to introduce individual lending by providing a reference guide that assists throughout the entire process and provides information on best practice and case examples.

The structure of the document is as follows:

  • Introduction: the pre-planning phase - designed to help you decide if your institution has met the top-line requirements to introduce individual lending
  • Phase 1: planning - how to conduct top-line market, competitor and customer research and to plan for the introduction of individual lending
  • Phase 2A: product and process design - how to conduct more detailed market and customer research and build that into designing products and processes
  • Phase 2B: pilot test — how to carry out and evaluate your pilot
  • Phase 3: roll out and implementation — how to apply lessons learned from the pilot and roll out individual lending across your branches, and
  • Phase 4: monitoring and evaluation — how to evaluate the success of individual lending and build a long-term vision around the development of the product.

The guide is set out in a highly readable fashion and is full of practical advice. At the end the key points which MFIs are urged to remember are summarised as follows:

  • You must make sure before you start that your organization possesses the right preconditions. It should operate in the appropriate macroeconomic and regulatory environment, be a sound institution, have sufficient management capacity and client demand.
  • You must understand your target client in order to design products that effectively meet their needs.
  • You must create a sound team to introduce individual lending.
  • You should seek external help for phases where your institution lacks the required capabilities.
  • Your individual lending team, and your senior management, must plan carefully for the introduction of individual lending.
  • You should introduce individual lending gradually and follow the proper sequencing.
  • You should conduct at least one successful pilot before you roll out individual lending, and
  • You should monitor and evaluate individual lending on an ongoing basis and deal with problems as they arise.
Author Dellien, Hans; Leland, Olivia
Publisher Women's World Banking
Number of Pages 130 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Product Diversification in Microfinance: Introducing Individual Lending Paper 2005

view page
This resource appears in: Loans and Lending Procedures

Group-based lending strategies have become widely established amongst MFIs - these include solidarity group lending, especially popular in Latin America, and village bank approaches that are prevalent in Asia and Africa. As part of a drive to provide a diversified selection of financial products, many MFIs in all regions have begun to expand their available credit products to include individual loans for some of their clients. This report points out that the objective of many MFIs in introducing individual lending has been to reduce the migration of valued clients to the competition, and to enhance their ability to attract potential new clients - group and individual loan methodologies represent dramatically different approaches to lending.

The purpose of this paper is to set out the Women's World Banking (WWB) approach to integrating individual loan products into group lending institutions. In doing so, the paper describes the processes and tools developed by WWB and aims to provide practical assistance to the increasing number of group microlenders globally that are beginning to provide individual lending products. WWB has developed a framework designed not as a blueprint, but as a series of guiding questions that aim to anticipate the decisions and challenges encountered by institutions in introducing individual lending.

Prior to setting out its framework, the paper begins with a brief overview of the key differences between group-based and individual lending. The main part of the paper is then divided into three sections, each covering a range of topics within:

  1. Planning Stage – Developing Strategic Vision and Leadership
  2. Design and Implementation Phase – Creating Institutional Capacity
  3. Testing, Evaluation and Integration Phase – Achieving Sustained Success

The analytical methodology for each phase includes a range of practical tools and staff workshops used as part of long term technical assistance from WWB. The estimated duration of the three stages is 6 to 8 months, 6 to 12 months, and 12 months for each in turn, respectively.

In order to provide examples and analysis from case studies, the paper draws on the experiences of four WWB network members that are currently integrating individual lending or that have completed the process - MI-BOSPO (Bosnia), Kenya Women's Finance Trust (KWFT) (Kenya), SHARE (India) and Association Al Amana (Morocco).

Author Dellien, H, Burnett, J, Gincherman, A, Lynch, E
Publisher Women’s World Banking
Number of Pages 82 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Comparing Farm Credit Requirements with Microfinance Credit Products Document 2005

view page
This resource appears in: Loans and Lending Procedures

This extract from a forthcoming paper by Malcolm Harper, includes an interesting table comparing five potential uses of money by a rural household in terms of characteristics such as lumpiness of investments and return, delay before return, predictability, risk, need for market linkages, etc. with the normal characteristics of microfinance credit products. The extract should prompt the reader to consider the question of how well the majority of micro lending meets the needs of farm based households.

Author Harper, M.
Number of Pages 1 pp.
Primary Language English (en)
Region / Country Global
Related Resources
An Analysis of Credit Scoring for Agricultural Loans in Thailand Paper 2005

view page
This resource appears in: Loans and Lending Procedures

Loan contracts performance determines the profitability and stability of the financial institutions and screening the loan applications is a key process in minimizing credit risk. Before making any credit decisions, credit analysis (the assessment of the financial history and financial backgrounds of the borrowers) should be completed as part of the screening process. A good credit risk assessment assists financial institutions on loan pricing, determining amount of credit, credit risk management, reduction of default risk and increase in debt repayment. The purpose of this study is to estimate a credit scoring model for the agricultural loans in Thailand. The logistic regression and Artificial Neural Networks (ANN) are used to construct the credit scoring models and to predict the borrower’s creditworthiness and default risk. The results of the logistic regression confirm the importance of total assets value, capital turnover ratio (efficiency) and the duration of bank-borrower relationship as important factors in determining the creditworthiness of the borrowers. The results also show that a higher value of assets implies a higher creditworthiness and a higher probability of a good loan. However, the negative signs found on both capital turnover ratio and the duration of bankborrower relationship, which contradict with the hypothesized signs, suggest that the borrower who has a longer relationship with the bank and who has a higher gross income to total assets has a higher probability to default on debt repayment.

Author Limsombunchai, V.; Gan, C.; Lee, M.
Number of Pages 8 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Benefits and Pitfalls of Statistical Credit Scoring for Microfinance Paper 2004 English (en) Spanish (es) French (fr)

view page
This resource appears in: Loans and Lending Procedures

This paper discusses the benefits and pitfalls of credit scoring applied to microfinance. Scoring is the use of the knowledge of the performance and characteristics of past loans to predict the performance of future loans. For example, when a loan officer judges risk by mentally comparing a current applicant with her experience with other applicants, it is scoring, albeit implicit and subjective. Likewise, when a microlender adopts a policy not to renew loans to clients who had spells of arrears in excess of 30 days in their previous loan, it is scoring, albeit simple and one-dimensional. Thus, although the name scoring may be new to microfinance, scoring itself is old hat. Statistical scoring is the use of quantitative knowledge of the performance and characteristics of past loans recorded in an electronic data base to predict the performance of future loans.

The evaluation of the repayment risk of the self-employed poor is the central challenge of microfinance. The innovations of microfinance to date have been the use of joint-liability groups and detailed evaluations of individual applicants to judge risk; scoring promises to be the next jump in efficiency. Although scoring will not replace joint-liability groups nor loan officers, it does have enough predictive power to significantly improve the evaluation of the risk of loans applicants.

This paper discusses what scoring can and cannot do, describes the data that microlenders who plan to use scoring should start to collect from all loan applicants, and outlines the basic steps in a scoring project.

benefits and pitfalls of credit scoring for microfinance  -  English (en)

ventajas y desventajas del scoring estadístico para las microfinanzas  -  Spanish (es)

les vertus et faiblesses de l’évaluation statistique en microfinance  -  French (fr)

Author Schreiner, M.
Publisher Giordano dell'Amore Foundation
Number of Pages 33 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Financing Agricultural Term Investments Book 2004

view page
This resource appears in: Loans and Lending Procedures

As the last book in the FAO/GTZ series Agricultural Finance Revisited, this publication focuses on the ways in which rural financial institutions can successfully provide term finance products and services, such as medium and longer term loans, leasing and equity.

The book is divided into four (A-D) parts comprised of 10 chapters. Part A (Chapter 1) reviews the different types of risks associated with agricultural term investments. The review is organized according to the risks faced by the investor (farmer) and those faced by the financier (banker). Part A concludes with a discussion on the costs of providing term finance from the financial institution perspective and a review of the feasibility of provisioning term finance.

Part B (Chapters 2-6) illustrates agricultural term finance in practice, featuring case studies and desk reviews from Bolivia, India, Madagascar, the Philippines, South Africa, Thailand, Benin, Ghana, Indonesia, Kenya and Mali. This section reviews the main features of the case study institutions and their motives for engaging in term finance. In addition, it examines the guiding principles for building up a term finance portfolio and discusses the main elements for successful term lending technologies as exemplified in the case studies. The section also highlights the basic principles of leasing and presents it as a feasible alternative for the medium-term financing of farm equipment; and reviews other financial mechanisms and institutional arrangements for financing large-scale and longer-term investments, such as equity finance, nucleus estate smallholder schemes and joint venture companies.

Part C (Chapters 7-9) focuses on the generic constraints that limit the expansion of term finance which may require support and action by governments and donors. This section of the book focuses on the legal and institutional constraints of securing the use of collateral, accenting some areas for legal reform. It examines policy options and mechanisms for managing systemic risk, such as innovative crop insurance products. Part C concludes with a review of the importance of securing stable funding sources to deal with asset / liability management risks. In this context, the role of donors and governments in enhancing the availability of suitable funding sources to term finance providers is reviewed.

Part D (Chapter 10) features the main conclusions relating to increasing the availability of term finance products and services. It summarizes the key findings and presents a series of recommendations for financial institutions wishing to introduce term finance products, such as adopting a long term business strategy, taking a gradual approach to term finance product development, and pricing term loans according to client risk. Part D concludes with suggestions on the role that donors and governments can play in fostering the expansion of term finance, such as supporting product innovation through pilot projects and technical assistance, mobilizing long-term funding sources, and instituting measures for creating an enabling environment that supports secured lending, leasing and innovative insurance products.

Author Hollinger, F.
Publisher FAO; GTZ
Number of Pages 175 pp.
Primary Language English (en)
Region / Country Global
Related Resources
An Experiment in Partnership-Based Microfinance: 1998-2002 Paper 2004

view page
This resource appears in: Loans and Lending Procedures

This document describes the seven-year learning process that resulted in Fundusz Mikro’s (FM) innovative support system for entrepreneurs. It describes how FM has developed its products based on a growing understanding of Polish entrepreneurs. The fact that FM was operating in Poland in the post-soviet era provided unique challenges that needed to be overcome. In the end FM decided to move away from the typical microfinance standard loan model and move towards an approach based more on trust and mutual assistance, which it calls partnership finance.

The partnership finance loan is repaid in monthly installments, like a standard loan. The difference lies in the way the borrowed capital is charged. The new product is unique in that the borrower participates in setting the loan terms and profit-sharing with the lender. One goal of the product is to teach borrowers to evaluate potential profits in a difficult market rather than focusing on the loan cost. Borrowers estimate the profit they will earn from the loan, then they determine the amount they will repay to us.

The first part of the finance charge is pre-determined and is deducted from the loan on disbursement (the charge is equivalent to what the loan funds would earn in a bank savings account). Before specifying the second part of the charge, the borrower provides estimates of the expected financial returns from the loan and the assumptions used. If these are realistic and the risks acceptable, then the loan decision is made before the second part of the finance charge is determined.

The borrower himself specifies how much of his prospective return will be paid as the second part of the finance charge. In this way he treats the lender like a partner. The second part of the finance charge is repaid in installments together with the principal. If, after repayment of the loan principal, the borrower finds that he did not obtain the anticipated return, the second part of the charge will be refunded to him in its entirety.

The document is broken down into five chapters as follows:

  1. A Brief Introduction to Fundusz Mikro
  2. The Need to Bridge the Gap Between Old Attitudes and a New Business Culture
  3. Changing Fundusz Mikro’s Microfinance Product: From “Hard Lending” to Equity Investment
  4. The Assessment Process
  5. Partnership Process

In conclusion the document finds these ingredients as essential in building the new business culture in Poland:

  • An entrepreneur’s business knowledge—the ability to assess the effectiveness of an investment
  • A sense of enterprise—the skill to foresee changes and adapt to them, the ability to perceive new possibilities, and a determination to attain one’s goals
  • A social attitude—the desire to establish, and the ability to build, good relationships with business partners

Interestingly, FM has found no difference in the repayment rates between partnership loans and regular loans made to first-time borrowers, and yet due to the nature of the partnership loans, borrowers on average commit themselves to finance charges 5% higher than they would have for a standard loan.

Author Szwajkowski, Witold
Publisher Development Finance Forum
Number of Pages 40 pp.
Primary Language English (en)
Region / Country Global
Related Resources
The Farmer’s Equipment Credit Article 2003

view page
This resource appears in: Loans and Lending Procedures

This article notes that when asking organisations representing agricultural farmers and peasants about the obstacles they find regarding the financing of family farms, the problem of medium and long-term credit allowing investment usually comes first. The case of Kafo Jiginew in Mali, a bank created and owned by farmers, where equipment credit has been implemented for over 10 years is discussed here.

The article presents the main conclusions of a study on impact carried out by IRAM (Institute for Research and Application of Development Methods) on behalf of SOS Faim of Kafo Jiginew’s experience. The main objective of the study was to come up with viable proposals for an improved medium-term credit within the network.

After providing some background to Kafo Jiginew, the article discusses the reimbursement rate of the equipment credit. It then provides a brief examination of recipients of the equipment. The bulk of the article then sets out an analysis of impact and discusses lessons learnt and challenges. The impact analysis is broken down into three sections: the economic impact, the social impact and the institutional impact.

The article then ends with the following questions:

  • The risk issue: does the longer duration of equipment credits involve a higher risk factor for the microfinance institution given the stronger threat of unfavourable contextual change?
  • A mass medium-term credit policy is more difficult to implement due to scarce resources, higher average amounts and the more favourable rotation of these. Does a less visible impact at the meso economic level imply a brake to the diffusion of the tool?
  • Precisely concerning the difficult mobilisation of long-term resources, what internal and external strategies should microfinance institutions implement in order to alleviate such deficits?
  • Finally, what strategy should microfinance institutions implement so that a product like equipment credit goes hand in hand with a dynamic of socioeconomic change and technological innovations?
Author Marc Mees
Publisher SOS FAIM
Number of Pages 8 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Credit scoring in microfinance Guideline 2003

view page
This resource appears in: Loans and Lending Procedures

Leading microfinance institutions (MFIs) in the Latin America/Caribbean region are setting performance standards that would have been difficult to imagine ten years ago. In some institutions productivity increased from 250 to more than 500 loans outstanding per loan officer, reducing the level of operational costs as a share of average portfolio from 35% to as little as 15%. However, it became increasingly clear that many MFIs were operating at caseloads in excess of their loan officers’ capacities. Arrears increased and MFIs were forced to reduce the load of loan officers, to allow them to manage delinquency. To maintain the same levels of cost efficiency, many MFIs resorted to larger loan sizes, thus moving into new market niches at the expense of smaller microenterprise clients. So MFIs that strive to provide quality financial services to the poor must investigate innovations that enable them to continue increasing efficiency without moving from their mission and target client base.

Credit scoring is one innovation that can push out the productivity frontier without overloading loan officers or squeezing out low income clients. Traditionally, MFIs have used subjective scoring - the use of defined parameters such as experience in the business, net margin of the business, profitability and disposable income - to analyze businesses and credit risk. Loan officers need a lot of time and training to be able to understand and apply the parameters and policies of subjective scoring. In contrast, statistical credit scoring forecasts risk based on quantified characteristics recorded in a database. The relationships between risk and client characteristics are expressed as sets of rules in a mathematical formula that forecasts risk as a probability. This can increase efficiency, outreach and sustainability by improving the time allocation of loan officers and reducing time spent collecting overdue payments from delinquent borrowers.

This guideline, which has been based on experience with WWB affiliates in Colombia and the Dominican Republic, takes readers through the factors to consider when introducing scoring and explains what sort of data is required. After reading it, a manager will be much better informed about what is involved in adopting this technique. It will become clear that after human resources and adequate lending technologies, information is a microlender’s greatest asset. As greater numbers of MFIs introduce electronic databases into their information systems, greater attention will have to be paid to data quality. The costs and limitations of scoring are outlined before the guideline goes on to give a detailed, step by step account of the credit scoring implementation process, including scorecard construction and staff training.

On average, scoring in microfinance in developing countries predicts with a significant level of accuracy. The number and range of mistakes, however, are much larger than for scoring in high income countries. Much of the risk associated with lending to self-employed workers is unrelated to quantifiable characteristics. Thus scoring complements, but does not replace, loan officers’ evaluations. Scoring is a third voice in the credit committee, a support for the judgment of the loan officer and credit manager.

Author Women's World Banking
Publisher Women's World Banking
Number of Pages 20 pp.
Primary Language English (en)
Region / Country Global
Related Resources
La Tecnología de Crédito Rural de Caja Los Andes Paper 2003

view page
This resource appears in: Loans and Lending Procedures

El propósito de este documento es evaluar la tecnología de crédito rural de Caja Los Andes en Bolivia, particularmente en la medida en que esta tecnología ha logrado resolver problemas relacionados con el financiamiento de actividades agropecuarias.

Los autores explican como la tecnología de crédito de Caja Los Andes esta basada en una rigurosa selección de los oficiales de crédito y una rigurosa selección de los clientes. El documento explica detalladamente el proceso de contratación y formación de los ejecutivos de crédito. También explica la importancia que tiene los oficiales de crédito para la tecnología de crédito usada en Caja Los Andes y como el sistema de remuneración empleado refleja esta importancia.

Los autores revelan paso a paso la tecnología de crédito de esta organización y como Caja Los Andes comienza a seleccionar a los clientes desde antes que estos se presenten a solicitar el crédito a sus oficinas. También detalla los pasos que deben de seguir tanto el cliente como el oficial de crédito antes y después del desembolso del crédito. Caja Los Andes personaliza el contrato de crédito de acuerdo a las características del cliente y de la actividad financiada, esto hace que la información requerida por los oficiales de crédito sea detallada y el conocimiento de las actividades sea amplio. El documento expone los costos de transacción de otorgar un crédito tanto para los clientes como para Caja Los Andes y como la tecnología de crédito empleada ha ayudado a disminuir estos costos y aumentar la productividad.

Los autores resaltan como la diversificación de la cartera de Caja Los Andes a zonas rurales les ayudó en los momentos de crisis en la economía boliviana. También resaltan como las condiciones de alta competencia en el mercado de las microfinanzas bolivianas ha empujado a las organizaciones a buscar nuevos mercados y desarrollar tecnologías nuevas para alcanzar nuevos nichos.

Author Rodriguez, J; Gonzalez-Vega, C;
Publisher USAID - DAI - OSU
Number of Pages 48 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Agricultural Lending Practices: CLUSA Zambia Rural Group Business Program Case Study 2003

view page
This resource appears in: Loans and Lending Procedures

The Cooperative League of the United States of America (CLUSA) began managing the rural group business program in Zambia in 1996. CLUSA Zambia initiated a Small Scale Out grower Scheme that addressed a critical but missing link between the farmer and the Agribusiness. The paper notes that the small-scale farmer’s main interest is how to access inputs and credit facilities, and how to secure a reliable market for the produce. Business development, in this case, was hindered by shortage of disposable income for investment and purchase of consumables. The agribusiness’s main interest is increased profits, which can be met by small-scale production. However, small-scale production here attracted high collection costs, and an expensive extension system, and there was also the risk of side-selling.

The aim of the program introduced in Zambia in 1996 was to increase rural farmers’ income through the promotion of sustainable farming technologies among groups of farmers that are democratically controlled. This case study sets out the background, methodology, key issues, and the results and impact of the program.

Interestingly, the case study includes findings in relation to the group versus individual liability debate. The paper explains how it was found that after the first season of working with a group in some cases the good farmers either left the program or only delivered enough crops to cover their own share of the group loan until the other farmers in the group had repaid. This led to fewer crops being marketed through the CLUSA groups. It was, therefore, decided that for old groups (i.e. groups that had been in the program for more than one year), group responsibility would be dropped.

The paper ends by reviewing the results and impacts found. In doing so, it looks at loan recovery and factors affecting loan recovery, innovations in loan recovery, social impacts, and sustainability. Furthermore, it sets out the key challenges with project implementation and methods to overcome these challenges and discusses program management issues.

Alongside details of the key lessons learned, policy and donor recommendations are also provided, where the case study concludes that the system could be replicated in other parts of Zambia where the Dunavant distributor system has a strong field presence. However, it also suggests that the system could be used by other agribusinesses and individuals where Dunavant is not possible.

Author Parker, S
Publisher Agricultural Lending Practices: Methodologies and Programs
Number of Pages 16 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Credit Scoring: is it right for your bank? Paper 2003

view page
This resource appears in: Loans and Lending Procedures

Credit scoring is a scientific method of assessing the credit risk associated with new credit applications. Statistical models derive predictive relationships between application information and the likelihood of satisfactory repayment. Models are empirically designed; that is, they are developed entirely from information gained through prior experience. Therefore, credit scoring is an objective risk assessment tool, as opposed to subjective methods that rely on a loan officer’s opinion. Clearly, credit scoring is a risk management tool. Scoring systems can help a bank ensure more consistent underwriting and can provide management with a more insightful measure of credit risk.

This document aims to provide a road map of the steps needed to design, implement and monitor a custom credit scoring model. It is not a step by step manual of the tasks required to introduce a credit scoring system in a bank. The authors draw on their experience of developing a system for a large Baltic bank. They point out that if a bank has fundamental problems such as inexperienced loan officers, inadequate procedures, persistent arrears, etc., then credit scoring will not be a priority.

If credit scoring is thought to be an appropriate tool, the six steps a consultant might follow when advising the bank management are:

  1. Present the concept
  2. Gather data to assess if scoring would fit in to the bank's procedures
  3. Put together a steering committee to discuss strategic and technical issues
  4. Design and pilot test the model
  5. Analyse results, draft procedures and provide introductory training
  6. Monitor and provide follow-up training

This is a useful paper for consultants and advisers involved in improving risk management procedures in banks.

Author Caire, D.; Kossmann, R.
Publisher Bannock Consulting
Number of Pages 12 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Lending Decision Model for Agricultural Sector in Thailand Paper 2003

view page
This resource appears in: Loans and Lending Procedures

The purpose of this paper is to develop a lending decision model (credit scoring) for the agricultural sector in Thailand. The data used in this study is from Bank of Agriculture and Agricultural Cooperative (BAAC), a major lender in Thailand agricultural sector. During the period of 2001 to 2003 a total of 16,560 agricultural loans were made available. The logistic regression and artificial neural networks (ANN) were used to identify critical factors in lending decision process in the agricultural sector and to predict the borrower’s creditworthiness (probability of a good loan).

The results of the logistic regression verify the importance of total farm asset value, capital turnover ratio (efficiency), and the length of bank borrower relationship (duration) as important factors in determining the creditworthiness of the borrowers. The results show that a higher value of farm assets implies a higher creditworthiness, which lead to a higher probability of a good loan. However, the negative signs found on both capital turnover ratio and the length of bank-borrower relationship (duration), which contradict with the hypothesized signs, suggest that the borrower with a longer relationship with the bank and a higher gross income to total assets has a higher probability to default on debt repayment.

Author Limsombunchai, V. C. Gan and M. Lee
Number of Pages 7 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Computer Aided Processing in the MF-Industry: Loan Tracking: the Case of SUMS in South Africa Paper 2002

view page
This resource appears in: Loans and Lending Procedures

S-U Management Service Limited (SUMS) is a South African based company offering a variety of management services to MFIs, focusing on transaction processing and administration. They administer the South African Land Bank’s microfinance ‘Step Up’-project. This paper describes their method of loan tracking which utilises computer aided processing. In terms of effective loan enforcement, time plays a crucial role: The shorter the period from arrears to action, the higher the credit discipline and the probability of loan recovery. This raises the following questions:

  • How to recognize arrears as early as possible?
  • How to react as soon as possible?

In the case of a MFI with several branches or outlets, a third question arises:

  • How to distribute the information about arrears as quickly as possible throughout the organization so that loan officers can take action?

The SUMS computer system is based on an infrastructure provided by Microsoft (SQL Server, Transaction Server, Visual Studio) and Crystalreports. The main aim of its operation is threefold:

  1. Serving information to agents and loan officers: A simple internet access is enough to enable them to log on to the data base and obtain real-time data on clients social data, actual repayment performance, repayment history etc.
  2. Administering arrears tracking: The operator runs a process four times per month to download some 30 – 40 000 small repayments to a centralized bucket account at a Commercial Bank. This information is electronically identifiable and reconciled to the individuals loan account. The system then automatically runs a process once a month to check for the status of defaulters against a matrix holding the defined rules of the product. Warning letters are generated to send to clients, ranging from friendly reminder to severe warning.
  3. Delivering statistics on individual as well as on a aggregated level. Loan officers can access both individual and aggregate statistics via the Internet making it easy for SUMS to keep loan officers updated all the time. This has reduced the numbers of call-ins from loan officers asking for information.

The management services provided by SUMS are expected increase the organizational efficiency of participating MFIs, allowing them to focus on their core business; and since the positive effects of computerization grow with the number of clients to be managed at a time, additional benefits will be realised due to pooling clients from several MFIs.

An annex contains a copy of a loan agreement as used by the Step-Up project.

Author Karduck, S.
Publisher University of Cologne: Development Research Center
Number of Pages 8 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Agricultural Lending Practices: Non-Financial Services with Financial Products Case Study 2002

view page
This resource appears in: Loans and Lending Procedures

The Kyrgyz Republic has 12 years of independent statehood, 9 years of reforms. The process of reform, transition to market economy showed that it is not easy to find the right way of developing. KAFC is one of the successful stories in our country, but before that the country made mistakes with agriculture lending programs. Kyrgyz experience demonstrates to other countries that creation and developing of viable and sustainable financial institution is very possible, if the efforts of local authorities and donors will come together and compliment each other.

Rural micro lending should be based more on preventive measures, such as obtaining comprehensive information about a borrower's household and enterprises and careful monitoring to keep risks to a minimum. The authors recommend that the Government should support rural borrowers by ensuring that all state banks offer cash flow based loans with frequent repayment schedules, accept a variety of collateral types and set an interest rate which is risk based.

Author Baktygul Jeenbaeva
Publisher Kyrgyz Agricultural Finance Corporation (KAFC)
Number of Pages 16 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Reaching the Poor Clients of Sri Lanka – People’s Bank Pawning and Savings Centers Paper 2002

view page
This resource appears in: Loans and Lending Procedures

This paper begins with an introduction to the pawning business and notes that pawn brokering services differs from other secured lending in that the lender takes physical possession of the collateral at the time of lending. Pawn broking also differs from most bank lending in that it is generally characterised by a high volume of small size advances, made for a relatively short period of time. A credit evaluation of the borrower is not required, nor is the loan monitored. If the amount is not repaid when it is due, the pawnbroker can recover the advance by auctioning the collateral. Therefore, credit risk and associated recovery costs are largely avoided.

The People’s Bank Act created the People’s Bank (PB) of Sri Lanka in 1961 as a state-owned institution. The bank was set up to develop the rural economy of Sri Lanka, and was allowed to conduct all types of banking business, including pawn brokering, which the bank started within the same year. Until 1961 private pawnbrokers were the only ones allowed to conduct pawn brokering, as regulated by the Pawn Brokers Ordinance No. 30 of 1942. Pawning has only increased substantially as a banking activity since 1995, as other types of lending have decreased. PB took a different approach as regards savings. Right from the outset, PB promoted micro-savings through products that appeal to poor clients, such as a low minimum balance and no restrictions on the number of transactions allowed.

This paper presents an interesting walk through the of the People’s Bank of Sri Lanka’s pawning and savings centers that have led to increased outreach of financial services to the rural economy. In particular, the paper covers the following topics:

  • History of the People’s Bank and the pawning business
  • Organisation and Operations
  • Products offered at PSCs
  • Customers and their needs
  • Competition and Marketing
  • Performance and Profitability
  • The Relevance of PSC to the bank and its customers

The paper concludes with the view that by gaining access to saving facilities and pawn loans, poor clients learn how to use banks and understand their requirements. This will help them in the future when it comes to more sophisticated products. It results in decreasing barriers between a formal bank and poor clients, part of the population still believed by many banks to be unbankable.

Author Grashof, L
Publisher GTZ
Number of Pages 11 pp.
Primary Language English (en)
Region / Country Global
Sri Lanka
Related Resources
Scoring: The Next Breakthrough in Microcredit? Paper 2002 English (en)

view page
This resource appears in: Loans and Lending Procedures

The challenge of microcredit is to judge the risk of whether the self-employed poor will repay their debts as promised. Scoring is a new way to judge risk; is it the next breakthrough in microcredit? Scoring does reduce arrears and so reduces time spent on collections, and this greater efficiency improves both outreach and sustainability.

Scoring, however, is not for most microlenders; it works best for those with a solid individual lending technology and with a large data base of historical loans. Even when scoring works, it is only a marked improvement, not a breakthrough. In particular, scoring will not replace loan officers in microcredit because much of the risk of the selfemployed poor is unrelated to the information available for use in scoring.

This paper discusses how scoring works, what microlenders can expect from it, how to use it, and what data is required. Success comes not from technical wizardry but rather from painstaking training of users: loan officers and branch managers will trust scoring to help them make choices only if they understand how it works and only if they see it work in tests. Most fundamentally, scoring changes how microlenders think, fostering a culture of analysis in which managers regularly seek to mine their data bases to for information that addresses business questions.

Scoring: The Next Breakthrough in Microcredit?  -  English (en)

Author Schreiner, M.
Publisher CGAP
Number of Pages 109 pp.
Primary Language English (en)
Region / Country Global
Related Resources
How to Reduce Arrears in Microfinance Institutions Article 2001

view page
This resource appears in: Loans and Lending Procedures

This article from the Journal of Microfinance, addresses the pressing issue of arrears reduction in microfinance institutions (MFIs). Its author, the Team Leader of the Development Resources Team for the US office of World Vision, writes in a clear and simple style which makes this otherwise academic article accessible to both policy-makers and field-workers.

The paper asserts that reducing arrears is crucial if MFIs are to achieve self-sufficiency. MFI staff must understand the causes of arrears – whether from clients' testing the MFI's determination to collect, crises in clients' lives, loans that are too large, or loans given on the basis of favoritism. Analytical tools for assessing and preventing arrears include key measures for analyzing arrears (e.g., portfolio quality ratios and performance ratios by credit officer) and financial ratio tests for determining appropriate loan size. The key to reducing arrears is to follow up late loans quickly, form strong solidarity groups, update and enforce credit policies, focus credit officers' services in a specific geographic scope, not lend to start-up businesses, and provide financial incentives for credit officers. In critical arrears situations, MFIs should suspend lending to new clients until portfolio quality improves, as well as ascertain clients' ability and willingness to repay in order to design appropriate strategies to pursue.

The author concludes that there is no magic recipe to reduce arrears. Often it is just plain hard work. However he does note the following:

  1. Prevention is always better than cure, so a clear understanding by the client that arrears will not be tolerated is key to keeping the situation from getting out of hand.
  2. MFIs need to have clear and effective credit poli¬cies and procedures approved by the board of directors that are followed by credit officers. If the policies and procedures are not effective, then the credit officers need to have a hand in creating new ones.
  3. Management and credit officers need to pay attention to details. The average arrears rate of each credit officer's port¬folio should be tracked weekly or biweekly and credit officers must respond quickly to problem clients in their portfolios. Likewise the credit supervisor must respond quickly to solve credit officer problems.

A microfinance portfolio with very low arrears can, within a few months, exhibit a dramatic rise in arrears, which can destroy an MFI. It is very important that managers watch carefully that policies are followed once they are put in place. If things are not working, then the institution needs to identify the problem areas and fix them quickly. The alternative is bankruptcy. The author does not use case studies to illustrate his point, but his references range from Zimbabwe to Nicaragua.

Author Norell, D.
Number of Pages 16 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Agricultural credit card innovation: the case of Financiera Trisán Case Study 2000

view page
This resource appears in: Loans and Lending Procedures

This paper describes and analyses a program that extends credit cards to agricultural input suppliers and rural producers in Costa Rica. The authors aimed to determine whether the program is financially viable and if it could be replicated in other rural areas of Latin America. A credit card program is innovative and unusual for a rural setting. Normally, credit cards have been promoted in urban areas with business firms and salaried employees who have steady cash flows. Credit cards in rural areas are not as common because potential clients, especially agricultural producers, have more seasonal and uncertain monthly cash flows.

The paper recounts the genesis of the agricultural credit card program which was driven by Financiera Trisán's desire to lower transaction costs, increase credit sales volume and resolve a legal conflict with the Superintendency. Credit card holders have a borrowing limit set according to repayment capacity and cards carry a market rate of interest. Individual clients are typically medium-sized, commercially oreinted farmers and are primarily male. The credit card products contitute nearly 75% of Financiera Trisán's assets and the organisation has generated a consistent positive profit margin. The paper concludes with a review of challenges facing the expansion and replication of the product, notably issues relating to credit bureaus, the postal service, computer technology and connectivity and delinquency control.

The authors conclude that the credit card product could be established in other areas of Latin America if the following conditions hold:

  1. a density of rural clients with variable but predictable cash flows;
  2. a minimum level of functioning physical infrastructure - telecommunications, electricity, postal services, roads;
  3. an appropriate legal and financial regulatory infrastructure that permits profitable intermediation;
  4. a profit-oriented, client-driven service provider with a history of active participation in the rural sector.
Author Quirós, R.; Wenner, M.
Publisher Inter-American Development Bank
Number of Pages 23 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Innovative approaches to rural lending: Financiera Calpia in El Salvador Paper 1999

view page
This resource appears in: Loans and Lending Procedures

Given the increased interest in rural lending, it is important to understand how a few financial organizations have been successful in reaching the rural areas. One of these organizations is Financiera Calpiá in El Salvador. Understanding the lending technology of Calpiá, the problems this technology has solved, and the challenges the organization still faces, is important for helping others to draw lessons about what can be done and what cannot be done in rural lending.

The paper is organized in six parts.

  • The first part briefly discusses the difficulties of rural lending, in order to identify the problems that Calpiá’s lending technology has been asked to solve.
  • The second part describes the Salvadoran context, with emphasis on the target markets reached by Calpiá and on the obstacles emerging from the environment.
  • The third part presents a snapshot of Financiera Calpiá.
  • The fourth one identifies the general principles followed by Calpiá in designing and implementing its lending technology.
  • The fifth part describes the rural lending technology of Calpiá in depth. This part examines actual procedures, as they are implemented, and, when possible, it compares the procedures used in rural areas with those used in urban areas. This part also discusses, step-by-step, the problems that each procedure solves during the lending process.
  • The last part summarizes lessons, presents conclusions, and explores future challenges.

To manage systemic risk, Calpiá undertakes portfolio diversification at three levels (the household, the rural portfolio, and at the total portfolio level). The institution also accepts diverse types of assets as collateral. The most outstanding feature, however, is the attention to ensuring availability of appropriate human capital. The selection and training of loan officers receives substantial and competent attention. Calpiá’s training program is outstanding. They have found that the stock of knowledge needed to understand agricultural activities and to establish farm repayment capacity is considerably more complex than in urban environments.

The experience of Financiera Calpiá in rural lending has much to teach others and this paper provides a detailed insight into how they have developed this side of their business.

Author Navajas, S; Gonzalez-Vega, C.
Publisher Rural Finance Program, Ohio State University
Number of Pages 46 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Measuring Microcredit Delinquency: Ratios Can Be Harmful to Your Health Paper 1999

view page
This resource appears in: Loans and Lending Procedures

This paper explores a problem that haunts many microfinance institutions (MFIs), that of accurately expressing the ratios of loan delinquency, i.e. the ways of measuring the health of an MFI in terms of loans repaid to loans defaulted on or delayed. The author is writing primarily for practitioners but his clear and even humorous style make this paper broadly useful for non-specialist MFI staff as well.

He suggests that any mention of a delinquency ratio should include a precise description of the ratio's numerator and denominator – otherwise the ratio cannot be inter¬preted meaningfully and may well suggest an un¬duly optimistic impression of portfolio quality. MFIs should track multiple delinquency indi¬cators, because no single indicator answers all the relevant questions. An MFI's outstanding portfolio tends to be roughly one half of the original disbursed amount of its loans. Collection rates, which divide amounts paid by amounts falling due during some period, are useful indicators but are subject to drastic misinterpreta¬tion: an MFI can have a 97 percent collection rate and still be losing a third of its portfolio every year. Hundreds of real MFIs are deceived by high-sounding collection rates into thinking that their portfolios are solid.

The most useful collection rate for day-to-day port¬folio management is often an on-time collection rate that tracks success in collecting payments when they first fall due, supplemented by a clean-up report that tracks collection of late payments. MFIs should avoid using the Asian collection rate, which includes past-due amounts from prior peri¬ods in the denominator of the ratio. Prepayments and late payments can create fluctua¬tions that limit the usefulness of collection rates other than the on-time collection rate for measuring per¬formance over a short period. Frequent renegotiation – rescheduling or refinanc¬ing – of problem loans makes it hard for an MFI to track and measure its repayment risk. Renegotiated loans should always be flagged and seg¬regated from normal loans in a delinquency report.

MFIs should usually not use arrears rates, which divide the amount of late payments by some mea¬sure of total portfolio or loan volume, because such measures tend to understate risk. Almost all MFIs should follow international bank¬ing standards by tracking and reporting portfolio at risk (PAR): this measure analyzes outstanding bal¬ances of late loans as a percentage of total outstand¬ing portfolio. MFIs with weak information systems may wish to use a simplified PAR based on the number of loan accounts rather than the amount of account balances. When tracking PAR it is useful to age the portfolio: loans are broken down by degree of lateness, using time intervals that correspond to the MFI's payment period and loan management process. Any PAR re¬port should specify the time interval(s) being used.

PAR information, supplemented by analysis of his¬torical portfolio performance, can generate a so¬phisticated estimate of probable loan losses. In judging an MFI's portfolio quality, PAR infor¬mation needs to be interpreted in light of the MFI's write-off policy and experience. PAR and arrears rates understate risk when a portfolio is growing very rapidly, or when there are long grace pe¬riods, unless loans on which no payment has yet fallen due are excluded from the denominator of the ratio. To the extent possible MFIs should disaggregate their delinquency measurement and reporting by loan product, region, branch, loan officer, and per¬haps client characteristics.

This paper, though densely written, is lively and gives a common sense series of explanations. The author’s arguments are logical and concise, and the overall effect is of a useful and professional piece which combines theory with practice, to the benefit of both. An annex summarises formulae for converting collection rates into annual loan loss rates.

Author Rosenberg, R.
Publisher CGAP
Number of Pages 20 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Controlling Delinquency Editors Note

view page
This resource appears in: Loans and Lending Procedures

The failure to control loan delinquency, which often leads to default, is probably the largest single downfall of institutions that provide credit to small farmers and other micro entrepreneurs; the risk of delinquency and default must be continually addressed. This Editor's Note is a short extract from a book on Managing Delinquency that was published in 1991. It provides an excellent introduction and reminder of the key points financial service providers should remember in relation to this important topic.

Author Stearns, K.
Region / Country Global
Related Resources
World Refugee Fund: 2018 Impact Report English (en)

view page
This resource appears in: Loans and Lending Procedures

Of the more than 65 million people displaced worldwide, less than 5 percent will return home, and those who do spend an average of 17 years in exile. Refugees and internally displaced persons (IDPs) face disproportionate levels of poverty as well as fundamental difficulties in securing livelihoods as "second class citizens." The provision of economic opportunity is an essential component of a longer-term solution, as access to finance is crucial to helping refugees and IDPs rebuild their lives: whether to start a business, pay for critical medical needs or continue their education.

This inaugural impact report clearly indicates that refugees who have endured unthinkable violence and living conditions are capable of demonstrating the highest possible loan pay-back behavior—repaying financial assistance as quickly and completely as the average global borrower. The findings in the report directly counter the misconception that lending to refugees and internally displaced people is "too risky."

World Refugee Fund: 2018 Impact Report  -  English (en)

Publisher Kiva
Primary Language English (en)
Region / Country Global
Keywords Disasters and Conflict, Lending to Refugees
Related Resources

Search Library Resources