When micro lending began, the idea was to raise people out of poverty. Microfinance institutions would provide small loans to people who wanted to start businesses. Back then, borrowers and their businesses were treated the same, no matter their occupation or gender. Loan options were very similar, with rigid terms and conditions, which limited the number of people who could be reached. In many cases, these limits also prevented creativity and individualism in the development of financial services for the poor.
Lately, this one-size-fits-all approach is being reconsidered so that it can reach larger groups of people faster and more efficiently. To make micro lending more effective, there are interconnected ideas and innovations that you as the micro lender should be considering and implementing.
1) Develop flexibility
Traditionally, microfinance organisations required clients to use loans solely for investment in their own business. But, many use loans to pay for food or other expenses. It is not a bad thing, as long as the borrower has the means to repay the loan and interest. By insisting that borrowers invest only in their businesses, micro lending companies sometimes force clients to lie.
If instead, for example, microfinance institutions should rather be willing to give a loan to a farmer to survive the “hungry season”, the time when a farmer’s stockpiles run out before the next harvest. They wouldn’t have to pre-sell their harvest at a discounted price in order to pay for food during that time. Instead, they could hold onto their crops and sell it at market prices when it’s harvested or even later. If the objective of micro lending is to increase incomes and improve the quality of people’s lives, credit that allows a family to eat during the hungry season can do exactly that.
2) Incorporate holistic thinking
Some microfinance institutions are beginning to look at micro lending from a more holistic perspective. As micro lending is in the business of changing people’s lives through loan lending, it has come to the microfinance industry’s attention that micro lenders should be extending their offering from just loan lending. Micro lending institutions are starting to use their loan lending as a means to improve the quality of people’s lives through innovative and targeted loan purchases.
In Uganda for example, some micro lending institutions offer loans for the purchase of solar lanterns. These lanterns, which have a two-year warranty, replace hazardous and costly kerosene lamps. The lanterns provide light for children to study at night, giving adults more time to work and can be used to charge mobile phones and power a radio. The lanterns, usually financed on a six-to-eight-month loan repayment schedule, actually pay for themselves in six months with the savings customers accrue on phone charging and fuel costs.
3) Actively research
For years, the effectiveness of micro lending programs have been measured primarily by the rate of loan repayment. But just because a client repays a loan does not mean the business has been profitable. A borrower may take on more debt, sell assets, go without food, or even take children out of school to help work and make the money needed to repay the loan. This means that micro lending institutions need to do research in order to establish the effectiveness of their services.
Rather than assume that loan repayment guarantees positive impact, the same rigorous controlled studies used to determine the effectiveness of other industries, such as drug effectiveness, should also be used to measure the success of financial programs.
Loans are an important financial tool, but only one tool, and not a universal tool. There are other products low-income people want and need, like savings accounts. For example, it makes sense to help farmers put aside money to cover food costs during the hunger months, rather than encourage them to take out expensive loans.
4) Get on board with technology
Technology is the ultimate tool for the success of microfinance. Through big data analysis of mobile phone usage and money transfers, lenders can evaluate potential customers and make loans without making clients travel long distances to the offices of the micro lenders. This makes the process faster and easier, but still secure. Using mobile money and loan services also lowers costs for both micro lenders and clients. Micro lenders don’t have to spend money on infrastructure and clients benefit from not having unnecessary fees.
Being able to use cellphones to get loans or make payments or deposits, instead of walking many miles to make transactions, is extremely convenient. People also value confidentiality as they may not want their family or neighbours to know that they’re saving or have access to those funds, fearing that family members will take this money and use it for other purposes. Thus, if the cellphone is in the client’s name, mobile money accounts can provide much-needed privacy and security for all of your borrowers.
5) Personalise your services
Micro lending institutions need to tackle the complex needs of the poor, which a loan can only partly address. Micro lending will be more effective if there are other safety-net and asset-building products in place, such as insurance, savings, and pensions so that borrowers can be secure and repay that loan.
This also means retraining the frontline staff who are making the loans so that they can better meet the clients’ individual needs. This will allow micro-entrepreneurs to pursue potentially profitable businesses. The key factor is listening to the client and having financial services that are tailored to the clients’ needs so that the micro lending industry can really make a difference in the number of successful micro-entrepreneurs.
Manage your microfinance
All in all, these tips & trends will allow your microfinance business to improve by ultimately helping your borrowers in ways that really matter. At the end of the day, the goal of any business is to remain profitable, but as a micro lender, it is also to ensure that your borrowers are taking out loans responsibly and for the right reasons, at opportune times. Your micro lending services should always offer convenience, innovation, and most importantly, financial stability for your borrowers.
In order to really implement these trends successfully, you need to make sure that you are utilising the right loan management software. Our loan management software can be used for any micro lending business of any size, from small, single offices to big groups, and even in banks. Our microfinance management software caters to any micro lending setup, from running your business centrally over the internet or just managing your business locally in your office.