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2.2 Required Adjustments in Methodology: Becoming Client Oriented

Most MFIs first achieved success by adopting a fairly standard group lending methodology with joint liability. It was recognized subsequently that lending needed to be more adaptable to client needs. Thus individual lending became more common, instead of or as a complement to group lending. It is better adapted to the heterogeneity of farm households and to the needs of seasonal agriculture. Essentially this change required MFIs to shift from what they can produce to products customers want, from serving the needs of institutions to serving the needs of customers (Woller, 2002). This section highlights changes that MFIs have implemented.

Product Design

The typical MF loan was designed as a one-size-fits-all product easily adopted by urban and rural households with periodic cash inflows, but less so for farmers with seasonal flows. The Grameen Bank inspired the granting of small, annual working capital loans disbursed simultaneously to all group members with each receiving the same or similar amounts. As borrowers establish their creditworthiness, subsequent loans were made in larger amounts (progressive or step loans). The loans were fully amortized, loan installments were collected frequently, often weekly or monthly, and included interest and principal. Interest rates were fixed regardless of loan purpose or size. Even borrowers who repaid early were not eligible for a new loan until all group members repaid. These rigidities facilitated record keeping for paper-based bookkeeping, and borrowers easily understood their obligations, but they also contributed to client exclusion, dropouts, delinquencies, and borrowing simultaneously from multiple MFIs (Meyer, 2002; Wright, 2000). Individual lending helped address these problems.

Individual Lending

Individual lending[1] involves a detailed assessment of the client's financial situation, character, repayment capacity, and his/her business and personal risks. This implies high costs for making the first loan, but costs are expected to decline over time as loan officers accumulate information about clients. Information obtained from applicants regarding their enterprises and expected cash flow determines if a loan will be granted, the size, duration, and disbursement and repayment schedule. Obtaining good estimates about a farmer's production, yields, and cash flow requires great skill and patience by loan officers.

The question arises about how to achieve good loan recovery without periodic group meetings and joint liability. Some MFIs discard joint liability but use group meetings for collection as paying installments in public pressures borrowers to pay on time. For example, ASA, operating in rural areas of densely populated Bangladesh, was one of the first in that country to reduce joint liability but continue group meetings for recovery (Armendariz and Morduch, 2005). MFIs are experimenting with allowing borrowers to use cell phones to make payments at any time but regular group meetings continue where loan officers collect unpaid installments.

Many MFIs encourage repayment by taking collateral in the form of a co-signer (guarantor) or physical collateral such as livestock, tools and machinery, land even without clear title, and other business and personal assets.[2] Documents such as tax receipts are taken as collateral if they are valuable to clients for other purposes. Thus the notional or use value to the borrower is critical, not the market value of pledged assets (Armendariz and Morduch, 2005). Postdated checks can also be useful in countries where the penalty for issuing checks without funds is severe and immediate compared to the lengthy legal process of seizing and disposing of pledged assets.

Access to future loans is an important incentive for prompt loan payment because repaying becomes more attractive than defaulting. Therefore, MFIs strive to build long-term client relationships, promote the image of long-term stability, quickly extend new loans to borrowers who repay promptly, increase loan sizes consistent with increased debt repayment capacity, and strive to maintain liquidity so clients are not denied loans due to a lack of funds. A limitation, however, is that most MFIs do not yet make term loans critical for larger farm investments (Höllinger, 2004).

Decentralization and Staffing

Individual lending implemented in branches located far from head offices requires decentralization of decision making. Branch managers, credit managers, and field officers require flexibility and authority to make decisions rapidly on loan applications and in amounts and terms to meet heterogeneous farmer demands. Two staffing options have been followed. One option is to conduct in-depth training programs for existing staff that are posted to serve the agricultural and rural market. The other is to hire specialized staff and assign them to exclusively serve this clientele. MIS and supervisory systems must be adapted so managers and loan officers have the flexibility and authority to respond to local market conditions and conduct oversight and control (Dellien et al., 2005).

MFIs implement different strategies regarding personnel assigned to serve agriculture. Some select their experienced credit officers and give them training in crop and livestock farming, while others hire persons knowledgeable about agriculture and teach them banking. Some prefer to hire staff from the local area with the expectation they will be satisfied to work locally for the long term while others prefer to assign new people who are not encumbered with local family and social obligations. Many MFIs use committees to make loan decisions so younger officers can learn from more experienced ones. Scheduling loan officer work activities must take account of agricultural seasonality, and performance incentives must be adjusted for differences in potential portfolio growth between rural and urban loan officers.[3]

Management Information Systems (MIS)

Many MFIs use paper-based record keeping systems to service thousands of clients in standardized group lending programs, but individual lending requires modern MIS systems for making quality credit decisions, monitoring loans, managing the loan portfolio, and tracking comprehensive data about clients and their businesses. For example, one constraint to the spread of flexible loan products for farmers in Bangladesh was that most MFIs preferred standardized loans that were easier to manage with manual bookkeeping.[4]

Information systems must also provide monitoring and verification reports for use at all levels of MFI operations (Dellien et al., 2005). Field officers need timely repayment reports to follow up immediately with delinquent borrowers. Managers must measure staff output to implement incentive systems, to monitor portfolio composition for desired levels of diversification, and to track loan recovery, rescheduled loans, new loans, and renewals. Dropouts must be identified and appropriate follow up undertaken.

  • [1] Some microfinance technical service providers (e.g. IPC in Germany) always advocated individual lending, while other MFIs began with a group model and shifted toward individual lending due to competitive pressures (Churchill, 1999). For example, group lenders in Bolivia began to lose customers when individual lenders moved into the market offering larger loans more quickly for repeat customers (Navajas et al., 2003b).
  • [2] Warehouse receipts are used to collateralize stocks of farm commodities and are being introduced in several African countries for food crops where they previously existed for only selected export crops (Coulter, 2009).
  • [3] Navajas and Gonzalez-Vega (2003a) present a detailed analysis of the individual lending methodology and incentives used by Financier Calpia in El Salvador (now ProCredit Bank El Salvador) so rural loan officers achieve productivity as high as urban officers.
  • [4] Some 25 to 30 million borrowers had access to microcredit in 2008 in Bangladesh, but only 1-1.5 million borrowed loans specifically designed for seasonal or investment lending in agriculture compared to a total of six to seven million people engaged in crop farming (Alamgir, 2009).
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