Thursday, July 11, 2013

Repayment Rates

This post is written by PHPG's summer intern, Charlie Bates. Charlie recently finished his sophomore year at Villanova University. Majoring in economics, he is spending the summer in Granada working as a microfinance intern with PHPG and also volunteers at a local elementary school with La Esperanza

PHPG Summer Intern
Charlie Bates - PHPG's Summer Intern

Microfinance has often been termed a miracle. While I don’t seek to address such a bold claim, I would like to draw your attention to a characteristic of microloans that is indeed surprising: their extremely high repayment rates. Unlike traditional banks, most microfinance organizations (at least those that are truly mission-focused) do not require collateral, nor do they have the legal protection from bad debts that traditional banks enjoy. But according to the Grameen Foundation, a pioneering microfinance organization, microloans to impoverished clients have a higher repayment rate than both US student loans and credit card debt.

In PHPG’s case, this translates to a repayment rate well above 90%. How is it possible to give a loan to someone who lacks many resources, except for business skills and a will to succeed, and continue to retain such a high repayment rate?

An easy start is to focus lending efforts on women, who are consistently marginalized in less-developed countries like Nicaragua. The Grameen Foundation points to numerous studies that demonstrate that women are far more likely to invest loans in their businesses and to use the proceeds for their children’s education and health. The fact that 78% of PHPG’s clients are women partially explains our high repayment rate.

Another way that microfinance organizations ensure repayment is by working with clients in “solidarity groups”. Forming groups encourages collaboration and mutual support and provides some healthy peer pressure to repay.

PHPG has seen a tremendous improvement in repayment rates since it started working exclusively in groups. We designate an especially qualified community member as a group leader, and he or she is responsible for collecting the repayments of the other group members and reporting any concerns. Being a group leader is a huge responsibility; if one of the clients does not repay his or her loan, no one in the group is eligible for an additional loan. This sense of responsibility helps increase repayment rates.

Juan Carlos & Juan Carlos Jr. collecting from a group leader

Since microfinance is very relationship-based, a key part of ensuring repayment is to establish and maintain relationships with the clients. More difficult in larger microfinance institutions, this is one of the hallmarks of PHPG’s operations. At our weekly collections, we visit the houses of the individuals and group leaders. Juan Carlos, our professional yet good-humored field manager (he’s an important part of the organization - you’ll be hearing more about him on this blog soon), is the point person for discussing repayment issues with clients. By making an effort to understand their situation and taking whatever steps we can to help, PHPG’s forming of relationships through consistent visits is vital to improving and maintaining our high repayment rate.

On a personal level, repayment comes from the clients’ gratitude for their loan, their dedication to their businesses and families, and their desire to see others in the community succeed using the same funds. It has been interesting to see the effects of PHPG’s measures to ensure repayment, and I look forward to seeing how they develop throughout my time here.


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