One of the criteria that I apply is based on the "general" loan-amount to repayment period. This was based on the following thoughts:
- The loan amount is in general directly related to the amount of extra revenue a business can make. Too much money can be risky, while too little money won't make enough of an impact. Generally, I am looking for a loan that will allow the entrepreneur to increase revenue at least by a factor of 2-3x the loan amount over the repayment period .
- Generally, I'd want revenue to be such that it will allow the borrower to repay about $100 per month in principal.
And then I ran into a problem. As I didn't have any loans in Nicaragua, I was looking to add one. However, the loans available there, all through Prisma Microfinance, have a payback period that is about double of what I would expect.
So I emailed Kendall Mau, Prisma's CEO. And he was more than happy to converse with me on the topic. Here is an extract of his take on this:
Ramón: "The main reason for my concern is the ability for a small amount to really make a difference for a borrower. I assume that, due to Kiva rules, a micro-entrepreneur can only have 1 loan at a time. If a loan (for example) allows the borrower to sustainably increase revenue 3x the loan amount, the growth of the business is limited by 3x$nnn over the loan period. Alternatives would be to loan more over the same period (risky) or pay back quicker. Then, the borrower could qualify for another loan, which would allow them more growth in a shorter period."Well, let's say this. For me, now two of my 11 loans are through Prisma: one in Honduras, and one in Nicaragua. If Kendall can base his entire MFI's business on this principle and still make a social impact, I can support him in that with a few loans.
Kendall: "I had this same thought, but my borrowers told me my theoretical thinking was not correct. If you make them payback faster, you are taking away the capital that they need to buy the materials and grow the business. This is why I see so many competitors out there giving really short loans, asking for payment every week or even days. The poor borrower isn't even putting the materials into use to produce the necessary income. If you're already having to payback substantials parts of the principal of the loan, you've stripped away the whole purpose of the loan. This is why we choose to give them longer paybacks to earn enough money to get ahead.
"I'm also an international consultant in the field. I was doing a project in Azerbaijan last year. They couldn't figure out why the borrowers were not improving financially. I looked at their loan fund and found that they were requiring such short payback periods that the poor borrowers didn't even have time to get the money working. Once we adjusted the payback periods, the borrowers were able to realize more revenue."