By Brian Kelly, KF9, Armenia

I have alluded to it several times in the past in some of my posts.  While maybe writing a sentence or mentioning a few words here or there, I think it deserves its own post because it’s turning out to be one of the central themes of what I have learned here about microfinance in Armenia.  The Human Factor.

Understanding your constituents is a vital part of doing business anywhere.  I think in microfinance this becomes especially important, specifically in regard to the customers.  Understanding their needs and capabilities is paramount.  While the good Samaritan in us may want to cater to a customer’s every desire, that usually isn’t the most prudent business decision.  This applies in microfinance, as many of the borrowers are applying for a loan for the first time, and may not have the instinctive financial literacy that privileged Westerners take for granted while growing up with allowances, to savings accounts, to that first credit card.  If you offered your clients whatever they wanted, they would probably take too many loans for too much money and likely be swimming in un-payable debt within a year’s time.  This isn’t any profound revelation, and it’s exactly the reason we have credit scores and screening of loan eligibility anywhere loans are made.

But how do you screen a potential borrower?  Sure a credit score makes it easy, as do other types of official documentation like an annual salary.  But in thousands of locations all over the world, you don’t have credit scores or hard data to rely on.  You only have your intuition, the relationship with the client, and your ability to assess a situation on the fly.  This is not easy, and I am time and again impressed and amazed at how the credit officers here can seem to do this with stunning accuracy.  This is evidenced by impressively low 30-day Portfolio-at-Risk (PAR), which measures percentage of payments in the loan portfolio that are at least 30 days late, and is also the basis for employee profit-sharing bonuses at the end of each year.

Time and time again I have tried to tease the secret out of the credit officers, “Can you describe the client assessment process?” Or, “What are the key factors in determining whether a client can responsibly handle credit?”  Usually they just shrug as if it’s the first time they’ve had to quantify it and say: (I’m paraphrasing) “It comes down to the borrowers themselves, how they act with their family, and the general vibe I get from them.” No matter how many times I’ve asked different credit officers in different branches, I’ve never gotten an elaborate or analytical-based model to reveal their formula of sizing up a borrower.  Always just “The human factor.” Next question.

I’ve witnessed the process firsthand.  Accompanying credit officers on new client visits, while I hardly can understand Armenian, I do understand the way they look around at the client’s home (oftentimes also the place of business) and ask where the animals are (for an agricultural loan), or to see the title to the property to verify that they do have as many hectares as stated.  And on top of the physical observation of a potential or existing business, old-fashioned trust-your-gut-itness can be the most valuable assessment technique.  Trusting your gut is a great method to use when you know the client and care about their ability to successfully repay the loan.  After you have experience granting loans for the right reasons to the people who aptly deserve them, then relying on your gut can be your most powerful credit-granting weapon.

How does one develop these skills?  Well part of it is probably ‘natural talent,’ but it also involves caring.  The credit officers care about their clients.  If they plan to drop-in on them unscheduled, often they call ahead to ensure it’s alright.  They trudge through fields or along muddy roads to make visits.  They know their customers inside and out, and how their customers are perceived by their own communities.  They actually care about how the loan will perform, so as not to encourage the borrower into entering a debt contract that will later prove overwhelming.  They’re doing the basic function of what a credit officer should, in a responsible manner, and it works tremendously well.  And in microfinance this is usually the only option in the absence of credit scores and collateral.

Perhaps most importantly, credit officers aren’t rushing to sign up every possible borrower they can find.  I’ve listened to several heated conversations involving borrowers being denied loan amount increases, and one with a credit officer quipping, “this isn’t a market, you can’t just name any amount that you want and expect to get it…” Awarding commissions on the volume of loans originated, as often seems to be the case for US lending institutions, is an awful way to incentivize healthy lending practices.  Which is why rewarding credit officers based on PAR makes so much sense to me, because it encourages making the right loans to the right people, benefiting all parties involved.

While it is painful to say no to a client, it isn’t rare that they will end up getting a loan eventually, after they prove that they deserve it, or after the community has seen over time that they will be able to manage the responsibility.  Taking the time to get to know someone and establishing a relationship over multiple conversations often leads to a borrower receiving credit. If I had a tagline for the most important thing I’ve learned in Armenia, a strong candidate would be “Relationships are what make microfinance go.”

The best answer is sometimes the simplest one.  This doesn’t mean it’s the easiest.  But time after time I am reminded here in Armenia that sticking to what you know best, and trusting intuition based on personal interaction with somebody is the key to doing business, and doing it well.

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