12 Rules of Microloans

Recently, an associate of ours with our work in Haiti inquired of the basic principles of microfinance and microloans. Kendall Anderson and his team with The Crossing Church have put a ton of passion into their work in Haiti. (Check out what they are up to here.)

Here is my quick overview of what I know has worked with microloans. This is what I gathered were best practices for the borrowers as well as the lenders, and it was good for the continuation of the microloan program. I will list my known resources at the bottom for your perusing.

Keep in mind that these are in no particular order. Give any feedback you may have below!

1 - Loans should be made to groups.

2 - Loan only to a few in the group with the stipulation that loans will be made available to the rest of the group once the first group has paid off their loans.

This also creates a community-driven motive to help ensure that one another pay off their loan payments. When one misses their payment, the others waiting their turn for a loan would make the payment themselves or pool from the group. This would come back around when they missed their own payments later.

3 - Loans should have a shorter payback period (10 - 18 months.)

It could be shorter depending on the size of the loan. 

4 - Loan interest rates were considerably higher, over 10%. 

Typically, interest rates are set based on risk. With microloans, the borrowers have no credit and usually no proof of income which causes them to seem as a "risky investment." There was no negative feedback from lenders attributed to the fact that they currently had ZERO access to funds.

Collection of Loans.

5 - They would come together to pay off their loans weekly. 


The way it worked was that it created a men's group or women's group sort of meeting. The lending organization would do teachings (theology, micro economics, business training, English courses, etc.) 

6 - They, as a group, would take the accounting.

7 - A local/national representative of the lending group would collect it.

Nationals collecting was important in that they had solid local knowledge. When a person said he could not make a payment, the collector-national would talk to his neighbors, call out his wife, or even reason with him based on local social practices (community embarrassment for not repaying, the future success of the community based on new cash flow, etc.)

8 - Once all in a group had paid off their first round of funding, a new level of funding was made available. (From a $100 loan to $250 loan.)

9 - They are required to have a "business plan" in that they are to explain how they will use the funds, their expected return, how the loan will be used, their expected profits, and, of course, a payback plan.

10 - The agreement should be made in writing and witnessed by other locals. 

11 - Failure to repay a loan will result in others in the group not having access to loans.

12 - Failure to repay a loan will also result in the borrower not having access to future loans.

Lending to an Individual versus a Group

I understand that the premise for most teams is to lend to one person and that most of the principles above are directed toward lending to a group. I would simply make a modification of some kind with these for an individual. First, an individual borrower is usually well known to a lending group. They are not some unknown person typically, and I understand this fact has much more grace than the rules above imply. 


Perhaps instead it could be communicated to him the willingness of our friends and community to lend more in the future based on the faithfulness of loan repayments. Or perhaps the vision of next level funds could be shared with him as a motive to work hard to repay. Or, perhaps his success could be tied to seed funds for a microloan program to the Haitian community at large; his repayment (including any interest) would go to a community fund for future lending/improvements. He could feel that his success ensured the community's success. 


Those are just some of my initial thoughts. Please, give me any feedback from your own experiences. So, anything your team learns or tries out would be welcome knowledge!

Resources

• 'Banker to the Poor' by Muhammad Yunus - Founder of the Grameen Bank - Other Publications
• 'A Billion Bootstraps: Microcredit, Barefoot Banking and The Business Solution for Ending Poverty' by Philip Smith and Eric Thurmon
• 'Working with the Poor; New Insights and Learnings for Development Practitioners' by Bryant Meyers (his follow-up to 'Working with the Poor'.)
• Kiva's Learning Section on Microfinance - Here This is a very comprehensive overview of Microfinance.

by

Grant R. Nieddu