Why, exactly, do you want this loan? A question rarely asked in microfinance.
On Monday, I “promoted” Akiba’s products with Davis, a fresh-faced loan officer just four months into his job with the bank.
Davis is saving money to pay the remaining half of his bride price, one cow and one goat, before he can marry his girlfriend and bring her, along with their young son, from the countryside near Moishi, in northern Tanzania, to Dar es Salaam.
Recently, competitors offering financial services to low-income clients, including Access Bank and National Microfinance Bank, have been seeping into the Kariakoo neighborhood of Dar, where Akiba has had a branch for almost twenty years. Feeling the pressure, loan officers at the local branch are asked to spend one hour per day walking the neighborhood, speaking with local businesspeople about the benefits of Akiba’s savings and loan products.
Given the high stakes on his financial success, Davis had every reason to want to boost his revenues by increasing his client portfolio. His enthusiasm for promoting Akiba’s loan products was infectious.
Carrying fistfuls of pamphlets and similarly overdressed in dark pants, white collared shirts, and blue ties, one might be surprised to learn that we were not, in fact, Jehovah’s Witnesses proffering the Good News.
Kariakoo is a fantastically diverse market. We navigated through narrow alleys between tiny stalls offering cell phones, haircuts, power generators, textbooks, televisions, toothpaste, and curtains. The shopowners let Davis make his case, listening patiently as he discussed the merits of Akiba’s products while I handed out our promotional literature.
Akiba’s new home improvement loans were the most popular topic of discussion. As they flipped through the brochure, I imagined the clients daydreaming of installing linoleum over a packed-dirt floor or replacing a leaky thatched roof with sheets of tin.
Akiba’s home improvement and electricity loans, each discussed in earlier posts, are examples of a bank attaching “use-of-proceeds” conditionalities to microloans. Under these loan structures, loan officers perform follow-up visits to ensure the clients are spending the loans as promised. If they are found to be using the funds for unrelated business or consumption, their interest rates are increased and their credit reputation is damaged. Future renewals are considered unlikely. ________________________________________________
Imposing conditionalities is a sensitive matter, one which reeks of “knowing what’s best for poor people.” Microfinance puritans prefer open access to credit, believing that entrepreneurs will use the proceeds as productively as they can and shouldn’t be told how to run their business or personal lives.
Money is fungible, the argument goes, so verifying appropriate usage of proceeds just adds costly administrative effort to the loan process.
Last week, I noticed an experienced loan officer consistently entering “additional working capital,” the most generic of possible answers, under “Use of Proceeds” on new loan applications. When I questioned him on his lack of specificity, he told me that however a client initially intended to use the loan didn’t matter, as once she actually had the money available, she would just use it to help manage her business as needed.
What to make of this observation? Hypothetically, do Akiba’s new conditional loan products advance the developmental mission of microfinance, by nudging borrowers toward socially beneficial uses of money (safer housing and electric connections), or do they just make microfinance more complicated and expensive? ________________________________________________
Jonathan Morduch of NYU, in the June 10, 2011 issue of Science offers his perspective on this issue, analyzing a recent impact evaluation study by two economics professors from Yale and Dartmouth, Dean Karlan and Jonathan Zinman. Morduch’s main point, familiar to anyone who has read “Portfolios of the Poor,” (which he co-authored) is that access to microcredit helps the poor manage the unreliability of their income, mitigating some of their daily uncertainties and money-related hardships.
What microfinance has not proven the capacity to do, despite numerous individual success stories, is raise the expected income of the average entrepreneur who gains access to credit. Karlan and Zinman’s article, in fact, finds that “household business activities” typically decreased after 1-2 years of loan cycles for their sample.
How then, to promote microloans? Loan officers tend to emphasize the ability of a shop-owner to make a large and substantial business purchase, perhaps a refrigerator or backup generator, the cost of which could be managed by paying back the loan in small increments to the bank.
Should they instead be emphasizing the overall consumption and income smoothing capacity of credit, or is that topic better left to academics? What if the client’s big-ticket item won’t necessarily contribute to their business, but might make them more comfortable working long hours – something like a television or a fan?
Akiba has pursued conditional loans gingerly, seeking early client feedback on the products before aggressively promoting them to new customers. Whether clients will appreciate the discipline they require is still to be determined.