For some of those reading and commenting on KF Claude Mansell’s blog “Pains and pleasures of Kiva’s P2P principles“, Kiva’s new policy of not allowing MFI partners to cover borrower default came as a surprise. And a risky surprise. Kiva took this risk in order to defend the validity of its P2P model. What, then, is the value of the MFI middle-man? The simple answer is that the MFI brings clients to Kiva. But MFIs are under scrutiny for the high interest rates they charge, some for their costly institutional structures, and now for not guaranteeing lender money on Kiva. Are MFIs the lynchpin holding the Kiva system together, or are they lynching their clients and Kiva lenders?
Let’s take the case of Prisma Honduras, S.A. The CFO of Prisma MicroFinance, Inc. (the holding company that oversees Prisma Honduras), Kendall Mau, summarized the trend of microfinance over the last year in Central and South America as “Crash and Burn” in his blog. He believes that MFIs need to tighten their belts and go “back-go-basics” with fundamental micro-credit provision before real recovery is possible. Prisma Honduras’ clients have certainly tightened their belts, so what is Prisma Honduras (I’ll refer to it as “Prisma” from here on) doing to tighten its own?
First, how has Prisma reduced its overhead costs?
1. Prisma employees did not receive salary increases last year. How substantial were Prisma salaries to begin with? Think of it this way: five of the twelve staff members at Prisma’s central office are also full-time students, and we all know that student salaries are not competitive. Note also that Prisma staff did not receive salary increases in 2008, either, and the the cost of living went up substantially. The salaries of Prisma employees are certainly not dollarized, but when you convert the prices on products like food, gas, and household goods from Honduran Lempiras to USD, Honduran consumers pay close to the equivalent of what American consumers pay.
2. In September ’09 Prisma shut down its secondary office in Tegucigalpa, letting go of the majority of the staff but transferring all clients to the main office (thereby increasing the client burden of each loan officer).
3. Prisma improved the internet connectivity of its offices in order to enable online communication between offices, instead of relying on expensive telephone services, and cut its communication costs by nearly 80%. This also reduced the time and resources spent sending managers between offices to oversee operations.
4. Prisma values providing professional training services to staff, but in the tumult of last year decided not to sponsor these often-costly seminars and workshops.
Second, how has Prisma Honduras reacted to the threat of increasing rates of delinquency and default, trying to protect its own portfolio and the portfolios of its Kiva lenders (whether or not they were guaranteed)? The truth is that Prisma has always been exacting in its measures of anticipating client viability, here’s the short-and-sweet summary of how:
1. Requiring potential clients to prove at least one year of successful commerce with real profits in the business they wish to put their loan towards; in addition to providing documentation of income and expenditures and loan-use budget proposals.
2. Performing thorough background checks through Trans-Junior and Equifat.
3. Clients applying for “personal use loans” (to put towards housing and the like) are often continuing Prisma clients who have demonstrated their business capacity; otherwise they must prove business solvency.
4. Obligating clients who apply for individual loans to have an aval, or guarantor, who also undergoes a background check. If the client applies for a group loan, the other group members guarantee the loan.
5. Requiring every potential client to provide at least two personal reference sources, aside from the aval or other group members.
6. Visiting every client ten days after they receive their loan to confirm that the loan was spent as their contract stipulates.
7. Charging clients 5L/day on delinquent payments. Should a client fall behind, Prisma pays a courtesy call to the client to establish a new date for payment on the loan amount and the 5L/day surcharge. If a client misses the new deadline, the loan officer visits to discuss the situation.
Note, also, that although Prisma’s overall client base and repayment security fell last year, the institution did NOT increase interest rates to compensate.
Compensation came from the part of individual Prisma staff members. They work from 8-5 Monday-Friday and are obligated to put in at least four hours on Saturdays. To make up for time lost during the summer military coup, staff at Prisma’s San Lorenzo branch office went to work seven days a week last fall. Their dedication to creating realistic repayment plans for their struggling clients actually resulted in increased client outreach and repayment, to the delight of all.
Because the Prisma staff and clients welcomed me so warmly, I have a biased opinion in favor of the institution. But Prisma is well aware of its obligation to Kiva lenders. As I see it so far, Prisma’s presence adds value to Kiva’s system.
Still, my opinion will not completely calm the anxieties of Kiva lenders. So to those who worry about risking the security of their Kiva portfolio with the new “no-guarantee” policy, I suggest reviewing the “field partner risk rating” (more about this in the “Kiva’s Role” section on the Risk and Due Diligence Page) of the MFI whose borrowers you consider funding. To those who worry about an MFI being more focused on its financial return than on client outreach, Kiva is currently testing a social performance monitoring tool (see Kiva Fellow Adam Kogeman’s blog “New Undertaking for Kiva, New Beginning for this Fellow“) and will share the findings with you as a “social impact” star rating of the MFI on the borrower profiles. Stay updated for this and, until then, keep reading the Kiva Fellows blog for insights on Kiva’s MFI partners.
Kati Mayfield is a Kiva Fellow working with Prisma Honduras, S.A. Though she and this blog are affiliated with Kiva.org and the Kiva Fellows blog, this is a separate blog page aimed at providing information to and answering questions of Kiva.org members who have lent to Prisma Honduras clients.