> Posted by Eleanor Coates
This is the third dispatch from Eleanor Coates, who is spending every day this month interviewing FINCA/Zambia clients as part of FINCA’s client survey process. For more from the field, be sure to read her first and second posts here.
I recognize that the microfinance industry has been ingenious, as a whole, at using incentives to reduce risk and moral hazard. FINCA uses village banks to provide social incentives for people to repay their loans in a timely manner, responding to the pressure of their friends and group members. They also use the groups to monitor client businesses, to ensure that the clients are engaging in entrepreneurial activities rather than using their loans for other purchases, such as consumer goods. Clients have the incentive to watch out for each other, to work together and to collaborate in their efforts to build up their businesses in order to not only repay their loans, but to ensure that they will be able to get larger loans in the future. FINCA has been able to structure the incentives for the village banks such that repayment rates stay high, allowing FINCA to continue functioning with interest rates which, according to many clients, are lower than most. However, there are other incentives at work in the relationship between the clients.
FINCA Zambia has both a social and a financial mission – to help the poorest entrepreneurs have access to loans, create businesses and jobs, and to be a commercially solvent and sustainable microfinance institution. FINCA clients, as we have seen through many client interviews, are well aware of the consequences of delinquency in their loans. But some people tell us that their loan officers are too strict when it comes to paying back their loans – that if they could only have some allowances it would be better for them. Loan officers have incentives not to make too many allowances for clients, while still earning and maintaining their trust. They face a delicate situation. While at first, FINCA’s strict insistence, as reflected in its loan officer incentive structure, seems at odds with its social mission, failed endeavors into microfinance by organizations who were not strong enough in their institutional incentives to collect loans show that the pressure that FINCA applies to its loan officers to collect loans from their clients is well founded. Without strong incentives, even with perfectly well-intentioned clients who will pay back, the logistics of exceptions would increase costs and interest rates, making loans affordable to fewer people. So while the incentive structures for loan officers do serve to create some tension between them and their clients, that tension is a necessary component of making microfinance work.