Changes to the Repayment Policy – who wins?
22 February 2010 at 08:51 nickigoh, KF9, Senegal 9 comments
by Nicki Goh, KF10 Senegal
Some of you may have seen Kiva’s recent announcement of the policy change with regards to repayments, or indeed Claude’s excellent post from last week about the impact of Kiva policies in the field. As someone who has spent more than her fair share of time trying to implement a stricter repayment reporting policy at SEM in Senegal during the last 3 months, I too have found myself wondering what effect the recent removal of lender protection is going to have on the MFI’s operations.
From February 1st MFIs are no longer able to protect Kiva lenders from a borrower default. What this effectively means is whereas previously an MFI could cover for a defaulting client by paying Kiva (and its lenders) back, in future Kiva lenders will only receive reimbursement for the exact amount received from borrowers by the MFI. Until now, SEM has often opted to protect Kiva lenders from defaulting loans – a move which has meant that, on occasion, they have been ‘paying back’ to Kiva more than they were actually receiving from borrowers each time a borrower was unable to repay. In doing this SEM have borne the costs involved to ensure that all loans are repaid, that lenders are happy and that their reputation is without blemish on the Kiva website.
Whilst implementing this new policy, I have made it excruciatingly clear to staff here in Senegal that if one of their borrowers defaults then the lender who has entrusted their $25 to the borrower’s cause will not receive back all of his or her money. Essentially, Kiva’s change in policy puts more emphasis on the relationship between borrower and lender: the selection of a borrower is becoming more personal and has a direct impact on a lender’s likelihood of recouping their investment.
The first reaction from the accountant at my MFI was one of relief, along the lines of “well, that’s good, this will help us reduce our costs and will mean that we don’t suffer financially from borrowers who don’t pay back”. However, as we went more into detail about what the policy implies for the lenders, his reaction moved to one of “do you think Kiva lenders might stop choosing to lend to us if we have problems getting our borrowers to pay us?”
So what repercussions might this policy have? How will lenders feel about no longer receiving a guaranteed repayment each month? How will their behaviour affect MFIs on the ground? Will default and delinquency rates become a major factor in a lender’s choice of Kiva entrepreneur? Or will this policy not make all that much difference at all?
As we all know, Kiva’s lenders are not all super-wealthy millionaires with bank accounts put aside exclusively for Kiva loans. Most Kivans give what they can to entrepreneurs, in the hope that either they will get the money back or, in a lot of cases, that they will be able to make a loan that keeps on giving cycle after cycle. And let’s face it: no system is perfect and yes, from time to time, a borrower is unable to repay a loan. We know that it sometimes takes people more than one attempt to get a business idea right or that crops fail, health bills or school fees need paying and loan repayments sometimes slip down the priority list. For that reason, many lenders would have found the old policy appealing as they could opt to give to entrepreneurs with the reassurance that Kiva’s field partner would protect them if anything should ‘go wrong’. Now that this option has been removed, how might a lender’s choice of entrepreneur be affected– is it going to be all about repayment rates and trying to find the ‘safest deal’?
It would be hard to criticize any lender who used the available information and statistics for what is essentially a business investment decision. In fact, I’d go as far as to say that lenders should make a habit of checking the default rates and delinquencies on field partner pages before making a loan. It makes sense that you should know how likely you are (purely statistically speaking, of course) to get your investment back and how successful that particular MFI has been with loan recovery in the past. After all, isn’t it a reward for those MFIs who are recovering all of their loans and managing their portfolio sufficiently well to avoid defaults?
We could also argue that it is only by being so stringent about ‘rates of return’ that lenders can ensure that there will be sufficient funds repaid to enable future loans to be funded and to share one $25 donation with as many different Kiva borrowers as possible. Through careful selection of borrowers using default rates we can be more confident that the total number of borrowers receiving loans should not be adversely affected.
But what about the type of borrowers that will receive loans in future? I suppose one thing I worry about is that closer attention to default rates by Kiva lenders could change an MFIs selection criteria. If MFIs know that their success in funding loans through Kiva is directly related to their default and delinquency rates then how might that change their borrower selection criteria? Will they stop ‘taking a punt’ on that one woman who really needs to be given a chance to make a go of her new business so that they keep lenders happy and ensure that more lenders have funds to re-lend to even more of their borrowers? Might they instead opt for limiting their loan portfolio to those people who have already proven they will pay and become like any other bank, that, as I was recently reminded: “gives credit only to those who don’t really need it”.
I am really interested to see how this policy plays out as the months roll on and have really enjoyed reading comments on the topic in the last few weeks. I especially hope that Kiva’s analysts will gain some insight into its impact on lender behaviour. And while I agree whole-heartedly with the need to provide full transparency of defaulted loans and delinquencies, I do hope that those who can afford to lose their $25 will look beyond the default and delinquency statistics on the right-hand side of the page when considering whether the entrepreneur is worth the risk. MFIs vary greatly in the type of work they are doing and the types of clients they are trying to target. Some of the more “socially-minded” out there operate at miniscule margins to ensure that their interest rates are as low as possible and their services are accessible to the most disadvantaged sectors of society. As a result, from time to time, their borrowers may struggle to meet their loan repayments, but there are often very good reasons behind the delinquencies. Illness, deaths in the family, unexpected rises in costs and, quite simply, inexperience in the world of business, hits those closest to the poverty line the hardest. They simply do not have the same reserves to meet financial obligations in times of hardship.
Kiva’s dedication to providing the personal stories through borrower profiles and journal updates allows the lender to ascertain the reasons behind the defaults and delinquencies. They also provide more information about the MFI partners and their strategic missions. If you don’t already consult the journal updates or the partner pages before funding a loan, please consider taking a look before deciding whether or not to give a MFIs and their borrowers a second chance.
Make an informed business decision now and fund one of Kiva’s currently fundraising loans!
Entry filed under: Africa, KF10 (Kiva Fellows 10th Class), Senegal. Tags: Kiva, microfinance, repayment policy.
1. Who really cares about Kiva loans? The difference between Kiva and MFI loans « Kiva Stories from the Field | 27 February 2010 at 10:01
[...] where partners will no longer be able to guarantee Kiva loans (see posts by Claude Mansell and Nicky Goh), many of you Kiva Lenders are worried this move will greatly affect your portfolio and that MFIs [...]
2. Tiphaine | 23 February 2010 at 03:29
My biggest concern would be to not lose micro-finance’s principles. The goal is to contribute alleviating poverty. We already know that micro-finance doesn’t help the poorest of the poor. If MFIs start to select entrepreneurs that have very low default risk to protect them self from bad publicity and if lenders start to be very attentive to default protection too, the risk is that even less of the poorest of the poor will get access to micro credit. We need, as lenders or MFIs to keep in mind why we lend and why we help those people. It doesn’t mean of course to not pay attention at all to the default risk protection because it’s also, as it was said before, a way to have a loaning cycle.
(I apologize, my written English is not perfect, I am French).
3. Dan | 22 February 2010 at 21:08
David, it is true that until very recently lenders were not able to determine whether a particular loan had default protection. However, the Kiva site in many places referred to the risk of losing your money if a borrower defaulted, so the norm for any lender who did even a precursory read was that default risk lay with the Kiva lenders. It was with quite surprise for many of us to find that a significant number of loans had default risk covered.
The disturbing aspect of this was the realization that such coverage allowed an MFI Field Partner to simply pay Kiva the stated repayment amounts without regard to whether the borrower “on the ground” actually made the payment — thus seriously undermining the peer to peer concept upon which Kiva was based. This move, while not a panacea, is a step toward transparency and credible repayment reports.
Default insurance which would kick in after a borrower has defaulted would be a different story, since the actual repayments of the borrower would have to be reported throughout the loan period.
4. David | 22 February 2010 at 18:51
Interesting that Kiva was supposed to be a marketplace where lenders could see the information and the features of the loan and make their own decisions. But not too long ago the default protection was not visible on the site at all. Then it was visible so that lenders could choose, and now no one has the choice at all.
5. C R Leonard | 22 February 2010 at 13:07
Post by Lisa seems a bit odd — “I believe they should look for that women who really needs the loans even if she is a ‘long shot’.” Until that statement I never ever thought folks would be loaning to someone base on the borrower being male or female?
Just odd?
6. Tibor | 22 February 2010 at 20:28
Gender is very important factor in deciding who will get my funding. That’s because women are underpriviliged in many countries where my borrowers are located. By giving women more economic power, they become empowered and independent, which give them more leverage in deciding about the future. Gender wise my portfolio will always be 1.3 men, 2/3 women.
7. SML | 23 February 2010 at 06:08
I don’t think it’s incredibly odd, CR. I know I look for female borrowers. That’s not to say I never loan to men– I do. I try to choose women, though, because there’s a lot of evidence that one of the best ways to improve the lives of women and children in the developing world is to economically empower women. Women who add economic value to their households are less likely to be abused, have fewer children and are more likely to keep the children they do have in school.
So, in a sense, Kiva is an easy way for me to direct my dollars towards a cause I care about– womens and childrens issues.
8. Jan & John, KivaFriends | 22 February 2010 at 12:07
I think there are many people out there willing to fund ‘that long shot’. I also know there are many who will be even more demanding of better transparency, more and more details. If Kiva lenders bear higher risks, then Kiva lenders will want more information on which to base their decisions. Kiva will have to do even more diligent surveillance to make sure MFI’s are doing all they can. It’s a big circle that goes round and round. We are all in ‘wait and see’ mode. jan
9. Lisa | 22 February 2010 at 11:06
thank you for your very well written blog. I have asked myself the questions you ask and I also agree with this new policy. I personally view all my loans as ‘donations’ -as I will never take the money out of the loaning cycle. I also know I will replace any money that is lost and won’t stop loaning to MFIs that have some defaults. I believe they should look for that women who really needs the loans even if she is a ‘long shot’. That is what this is all about to me.
Lisa