In the past month, I’ve worn my soles thin pounding the pavement visiting Kiva borrowers in the major cities of La Paz, Cochabamba and Santa Cruz. I’ve come to love and trust the Kiva microfinance institutions (MFI’s) I’m working with here and would recommend them hands down to any prospective borrower out there.
Yet everywhere I go I can’t help but notice the seemingly endless storefront banners offering cheap credit, personal loans, instant money advances. In large cities and small towns I see consumer banks, community cooperatives, microcredit institutions, pawn brokers and loan sharks on every corner. Available credit, it seems, is all over the place in Bolivia and the myriad of choices for borrowers is overwhelming. It’s a saturated microcredit world here in Bolivia.
There’s a reason for this: Bolivia is still overwhelming impoverished with nearly 70% of the population eking out a meager existence in the informal economy. Demand is great for small loans.
And microcredit has a long history in Bolivia. In 1986 La Paz welcomed the first microfinance institution in Latin America. Since then the number of MFI’s has grown to nearly 30 with over a million active microcredit borrowers in a country of just 10 million people. Add to this the far greater number of for-profit commercial banks and often-predatory informal lenders. Indeed, competition is intense here.
So how does a Kiva partner succeed here where borrowers have an unlimited choice of lenders?
This has been on my mind as I ramble about Bolivia as a Kiva Fellow. I am not a financial expert nor do I have deep expertise in the world of microcredit, but I’ve gleaned some things in the past month from my discussions with Kiva borrowers, loan officers, branch office managers, and by reading the Kiva Fellows Blog.
This is Kiva money, after all, and like all of us who lend through the Kiva website, we want to put our money where it will have the greatest impact.
So what seems to work for Kiva partners in the field?
1. Offer more flexible loan application requirements, target disenfranchised groups, and deliver faster turnaround times
For-profit commercial banks can be restrictive here in machista Bolivia when dealing with women – even today some banks require a husband’s signature to receive a loan. And the salary and collateral requirements of conventional banks are so high that they eliminate huge swaths of the population from eligibility.
Socially-motivated MFI’s specifically target women and other groups, offering traditionally disenfranchised borrowers much-needed access to credit, a major distinguishing feature. Banco D-MIRO in Ecuador, a Kiva field partner, grants special loans to disabled and/or HIV positive borrowers. This is but one example of the many ways Kiva partners reach the neediest communities.
I asked Efraín, a loan officer in Santa Cruz, what he thinks is the biggest factor in getting borrowers to take out loans through Emprender, one of the Kiva partners I work with here in Bolivia. Without hesitation he told me: Emprender’s fast turnaround time. Borrowers who need microcredit often need it quickly, and Emprender normally disburses funds within 2-3 days of application and even faster for repeat borrowers.
For clients considering the spectrum of for-profit banks (bureaucratically slow) and loan sharks (rapaciously fast), Emprender seems to have found the sweet spot. I’ve reviewed a good number of loan application folders and can report that Emprender does this without sacrificing systematic appraisal or due diligence. Their super-low 0.33% Kiva default rate and high customer satisfaction confirms that their process works.
2. Offer specialized credit products and more flexible repayment plans structured to fit the needs of the borrowers
MFI’s would not survive if they offered borrowers a single “one-size-fits-all” loan. Another Kiva partner I work with, CIDRE, specializes in loans geared towards farmers whose cash flows are highly dependent on planting and harvesting cycles. Agricultural loans that offer two payments over 12 months, rather than the typical monthly payments, favor rural borrowers.
Emprender offers loan repayment schedules targeted to new entrepreneurial ventures where startup costs are higher than early revenue. Educational loans offer students a grace period while they are actively matriculated. Other Kiva partners offer loans designed for housing or medical treatment with unconventional payment terms that favor specific borrowers.
3. Offer nontraditional services and build relationships that add value for borrowers
Some MFI’s offer small business and money management classes, insurance, even savings assistance. They are not limited to purely microcredit; such a suite of complementary services is the realm of microfinance which can more dynamically serve the neediest borrowers.
MFI’s can also offer non-financial services such literacy programs or vocational training support, child-care assistance, and access to health care. Emprender, for example, runs a medical clinic in several of its branch offices with doctors on-site to care for sick borrowers, provide prenatal care, and promote wellness and nutrition.
For socially-motivated MFI’s these types of additional services and support go way beyond simply providing loans.
Additionally, Kiva’s partners find greater success when they invest in building lasting customer relationships with their clients. Not only does this increase the likelihood of repeat loans by satisfied (and proven) borrowers, it also helps them find new borrowers through their network of happy clients. This is something that Kiva recognizes as important; as a Kiva Fellow I am tasked with collecting MFI net-promoter scores from the borrowers I visit to measure customer loyalty.
4. Offer group loans and other services that support repayment
Group loans, known in Bolivia as solidarity loans, are loans granted to more than one person. These loans, a mainstay of microcredit, allow for loans to be managed and guaranteed in a community-supported environment. Solidarity loans, with the support of the group, help borrowers (especially new ones) develop basic money management skills and know-how with credit, and potentially keep repayment rates high. I’ve met many Kiva borrowers in Bolivia who started receiving microcredit loans as part of a group and later “graduated” to individual loans that better suit their specific needs.
There are many other creative ways to support repayment that ultimately makes the Kiva partner more successful and the borrower more satisfied. As mentioned, I’ve seen flexible payment plans better suited to farmers, new entrepreneurs and students. And I’ve seen how strong relationships between the loan officers and clients can demonstrably reduce loan delinquency.
Repayment support is one key area that puts Kiva partners a cut above the rest.
5. Last But Certainly Not Least: Partner to reduce costs and promote innovation
There’s no question that the costs of MFI’s to administer loans are higher than commercial banks:
- MFI’s cost of borrowing is usually higher than for traditional banks
- MFI’s generally have larger numbers of clients and in more remote locations
- MFI’s typically have a greater number of smaller loans
Higher costs have the most direct impact on the interest rate offered to borrowers. And searching for a loan is often like shopping for an airplane ticket: the lower the price, the more attractive to the consumer. As an added challenge, microcredit interest rates run between 20-30% in credit-saturated Bolivia, on the lower end of microcredit rates worldwide. So there is little wiggle room for the Bolivian MFI. For Kiva partners to compete with other lenders they must keep their costs low.
While difficult for MFI’s to compete head-on with larger consumer banks, they can turn to partners for assistance. This is where Kiva really helps. Since Kiva funds partner loans at 0% interest (yes, you read that correctly – zero-percent interest to Kiva partners!) this can make a dramatic difference in lowering the borrower’s interest rate.
All the loan officers I’ve asked at Emprender told me that the Kiva-funded loans they offer are more cost-effective and beneficial to their clients. Some even told me that nearly 90% of the loans they administer are through Kiva, a remarkable figure. Kiva’s partnership has helped Emprender “level the playing field” with other lenders by offering competitively lower interest rates and its large number of Kiva loans bears this out.
More clients and greater loan volume (reasons #2 and 3 above) drive up costs simply because they take more time. Most loan officers I’ve traveled with have more than 150 clients spread out over relatively large distances. MFI’s normally operate on a shoestring budget and tools such as computers can be scare in most branch offices. Simply a donated laptop computer can go a long way in helping automate time-consuming menial tasks.
Partnerships with some NGO’s or international agencies can provide institutional support and stronger portfolio management to build more efficient, cost-effective processes which also lowers costs.
And strategic use of technology, such as the compelling M-Pesa mobile phone money transfer system in Africa, can transform how loan funds are disbursed and payments made. In Bolivia — regardless of age, socioeconomic background, or location — nearly everyone has a mobile phone. Emerging technologies offer MFI’s new ways to extend their reach into more isolated communities while lowering costs. MFI’s today have little budget or capacity to implement these things alone but foundational partnerships can help provide financial backing and support.
It’s a hotly competitive microcredit world here in Bolivia. I’m happy to report that Kiva’s partners in the field are finding innovative ways to stay ahead of the pack.