Microfinance as a Community Institution

A first person account of microfinance in Malawi:

As far as underwriting criteria go, the one thing that gets the loan officers comfortable with the borrower is monitoring. This is a country where few borrowers have access to paper, and no one I saw had electricity in their house, so no one had an in-home computer. Never mind the Internet. Documentation on business revenues, cost, and profits is probably nonexistent before the first loan. So, loans begin very small — about $100-150. The timeline to repay is short — a month or two. The interest rate is not nominal — 2.5% a month. If the first loan is repaid, then the borrower may get a second loan. There are no refinancings of unpaid loans. And, borrowers must have an “exit plan” — a plan to build up savings so as to quit borrowing at some point. To get there, borrowers are required to deposit weekly into a security account with their trust group (more about that in a minute) and into a savings account. Borrowers are also taught how to keep business records and calculate profits.

But describing the mere mechanics of the loan process gives a very shallow picture of what’s really happening here — the microlending operation goes far beyond merely giving out small loans. It’s a comprehensive system that involves careful oversight by the “Transformation Officers” (loan officers), hands-on financial education for new borrowers, community support and accountability in the form of weight watchers-style monthly meetings, village co-ops that serve to guarantee each other’s loans, and a bank-on-wheels.