Multiple Loan Cycles – A Never Ending Cycle?

Matt Raimondi, KF11

The long-term viability of the microfinance industry depends on microfinance institutions’ ability to develop a sustainable business model.  Microfinance Institutions, after all, are business ventures; they must be financially viable in the long run or they will eventually be forced to fold and shut their doors.

Like many businesses, MFI’s depend heavily on repeat customers.  i.e. people who take out loan after loan, often increasing the loan size with each loan cycle.  Prior to my Kiva Fellowship I was naive to this practice.  While I understand the reasons behind this business strategy, I have struggled to accept it as reality.  It’s true, despite my capitalistic beliefs I also believe that MFIs have a social responsibility to their clients.  Some clients I have spoken to can’t even remember how many loans cycles they have had, many having had upwards of 20 loans throughout their relationship with the MFI.  I often ask myself: Are multiple loan cycles a necessary evil? Are they really evil?  Are clients being taken advantage of?  Do multiple loan cycles create a dependence on the MFI?  Do micro-loans really lead financial independence and improved quality of life?  Do clients understand what they are getting into?  Are MFIs creating a never ending cycle?

As I near the end of my Kiva Fellowship I would like to share the conclusion I have come to.  The answer to each of these questions is…I don’t know.

On that note, let’s discuss the effects on clients of multiple loan cycles as a business strategy.

First, the negatives.

Loan disbursals are a joyous occasion for microfinance customers.  Many have never had so much money at once and the loans give them hope and empower them.  However, we all know how addictive easy debt can be after the recent worldwide economic disaster caused largely by over-indebtedness.  Once you taste the good life it’s hard to go back.  Hence, many clients are eager to take out their next loan and MFIs are happy to provide them with financing and possibly a bigger loan.  Loan officers are often encouraged to sell clients on subsequent loans and up the loan amount whether the client needs it or not.  Clients that take out more money than necessary tend not to invest the money as wisely and can lead to problems paying back the loan.  This can cause over-indebtedness and dependence on loans, creating a seemingly never ending cycle of loans to support their new lifestyle.

Now, the positives.

MFIs are businesses and repeat clients are the best clients and have a huge effect on profitability.  By lending to the same clients it helps to mitigate risk and the unknowns that come with new clients.  Multiple loan cycles help build a relationship and allow an MFI to offer improved, more customized service.  Multiple loan cycles offer clients a steady stream of capital instead of one off large injection of capital, allowing them to continue to grow their business and improve their quality of life.

At the end of the day an MFI is providing a service to it’s clients.  Like any business, to be successful they must offer a service that people want and need.  I have met with countless clients and a common theme is how thankful they are for the loans.  Many are longstanding clients and are proud that they have been able to go through multiple loan cycles and are adamant that the loans have improved their lives.  They see no issue with having had so many loan cycles.  I still worry about over-indebtedness and dependence on the loans but I have come to accept that multiple loan cycles are an essential business strategy for MFIs to be successful and are not much different from credit cards or loans that businesses in the developed world employ.

What do you think?  I’d love to hear your thoughts…

Matt Raimondi is currently serving as a Kiva Fellow at FAMA OPDF in Juticalpa, Olancho, Honduras.  FAMA OPDF is a pilot Field Partner and recently posted their first Kiva loans.  Click here to support FAMA OPDF by making a loan to one of our entrepreneurs. Click here for more information on FAMA OPDF.

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