Give credit to people’s industry

Albeit in support of the greater good, opportunities in microfinancing projects in poor-world countries may be a more accessible prospect than we would first think, says Paul Hunt, managing director, Phoebus Software

Paul Hunt
Paul Hunt

This April, we got involved with Kiva & an organisation that allows people to lend money via the Internet to microfinance institutions (MFIs) in developing countries, which in turn lend money to small businesses.

The project has been a huge success and we have extended it. And while the people at our firm might be IT folk, 90% of our employees have backgrounds in the mortgage industry and we have enjoyed doing something for the greater good while nurturing our lender roots. We started lending to just three people, in Cambodia, Honduras and Nicaragua. But since then we have leant to four new borrowers from Nicaragua, and one from Ecuador.

Nicaragua first. Miriam De Jesus Lopez Valdivia has been a schoolteacher for 25 years, her husband is a truck driver, and they have two adult children. They needed a loan of just $350 to repair the roof in their kitchen. We are one of just five lenders who stumped up the cash. Since then, she has already paid back 20% of the principle and is well on track to pay off the whole loan by the agreed date of October 2011.

Nohemi Justina Hernandez Moran is another Nicaraguan teacher. This is her first loan and she will use the money to repair her roof. The $975 loan has been jointly funded by 19 Kiva lenders.

The field partner we used to fund these two loans, Ceprodel, has recently been downgraded. Yes, even in microfinance, downgrades are inescapable. Kiva re-assessed the level of risk Ceprodel posed recently. During the due diligence process, Kiva found Ceprodel did not merit their five star Field Partner Risk Rating.

A five star rating means that this field partner has a very significant amount of evidence demonstrating high likelihood of repayment and that Kiva has full confidence in the field partner’s ability to dutifully administer and collect your loan. It’s the best of the bunch. Well, Ceprodel has been downgraded, albeit only to four stars. This tells us there is still a high likelihood of repayment.

We’re not unduly worried. Founded in 1991, Ceprodel has some pedigree. It has 120 employees working in 16 offices across Nicaragua serving 14,000 clients and dozens of co-operatives. Funders have included BCIE (Banco Centroamericano de Integración Económica) and the European Union. And in November 2008, the European Microfinance Platform actually named Ceprodel one of the ten most innovative institutions in the microfinance sector. Furthermore, its portfolio yield is 35% & it looks like a safe bet.

Rosa Argentian Sanchez Morales, who runs an EU-supported mentoring programme, is borrowing $1,200 to fix her roof. She has a good credit history having paid back a previous Kiva loan & to build a wall around her house to keep out thieves. We are one of eighteen lenders who funded her latest loan. We’ve already had two payments back. Our final Nicaraguan loan went to a third teacher, Manuel Antonio Cruz Benavidez. He borrowed $725 to buy building materials and supplies to seal and plaster two walls in his house. He’s also got a good loan history & this is his fifth loan from Kiva. His previous loans have enabled him to improve his living conditions & all of them were paid back in full and on time. The loan has been funded by 10 Kiva lenders. He’s already paid back 18% of the principle.

[She] is borrowing $1,200 to fix her roof. She has a good credit history having paid back a previous Kiva loan – to build a wall around her house to keep out thieves. We are one of eighteen lenders who funded her latest loan and we’ve already had two payments back

The field partner we used for these two loans, Afodenic, has a three star rating, meaning it’s a moderate risk. But Afodenic’s Default Rate is 0.00%, far lower than Ceprodel’s 0.07% & although both are below the Kiva average of 1.66%, despite the fact it has been working with Kiva for 31 months now. And with a Delinquency Rate of just 0.12%, well below that of the average of a Kiva field partner, which is 3.08%. Not bad.

But the truth is we’ve been lucky with the Nicaraguan loans. There has been a huge amount of disruption in the country’s microfinance sector recently. The Movimiento No Pago, which I will come to shortly, has been the most visible part of the problem. Less publicised, but perhaps more important was the weak commodity prices, particularly of cattle. Many MFIs are heavily committed to cattle and have been affected by low beef prices. Fortunately, non-commodity based portions of the portfolio have tended to fare better than the commodity based portions & and the loans from Phoebus have generally been on homes.

Delinquent borrowers
No Pago is a different story. It’s a pressure group for non-repayment of loans and it gained a lot of popularity earlier in the year. Fortunately, that seems to largely have dissipated, as a result of the Nicaraguan National Assembly’s passing a law to allow delinquent borrowers to re-negotiate loans with more favourable interest and terms. Nice to see the government backing the lending industry, albeit in a different country.

The fifth loan was to the Hermano Miguel Communal Bank in Ecuador. A recent Fitch report argues that the impact of the downturn cannot be generalised across regions but varies from country to country. Ecuador has fared better than others and the quality of portfolio there has remained high. MFIs were being very conservative in the run-up to the 2009 election. When the elections went smoothly, demand for credit increased as the crisis was getting acute elsewhere. The group we have leant to is made up of seven women who want to use the money to pay utility bills and the costs associated with educating their kids. It’s a big collective loan, for $2,700, but it has been funded by 61 lenders and already they have paid back 58% of it.

So, it looks as though we can count on the quality of our loans in Nicaragua and Ecuador. If only UK lenders felt so confident with the quality of their own loans.