The Micro Finance Institution

Lending institution

Cannot afford a huge number of small loan procedures if the administrative cost of each procedure is high: it has to be be much smaller than in a bank, shifting the burden of proof from the operation to the personality of the client. A deep understanding of her/his history, way of thinking, motivation, trustworthiness, bonds to the family and the neighbourhood, reasons for being poor allows a successful long-term relationship made up of recurrent loans each fostering an advancement in her/his life.

Theory of games

has widely shown that repetitive "games" (loans) generate a setting where it is better for the borrower to pay back (so to have the perspective of obtaining trust again) than to cheat. Successful as they are, "tit-for-tat" strategies rely on the first positive move of the lender, who trust first, engendering an economic effect reinforcing the psychological effect of "demonstrating that trust was deserved".

High repayment ratio

With 98% up to 100% loans paid back on time due, is the single strongest reason exhibited by most microfinance institution to the skeptical financial and political community. Yes, the neglected poor, illiterate and lacking formal training, living in doubtful hygienic conditions, after a life of oppression and emargination can be good and remunerative client of financial products, keeping their promises and activating all their entrepreneurial and personal energies.

Monitoring costs

Conversely, to keep the monitoring costs low, many microfinance institutions (MFIs) require the borrower to set up a group of peers involved in a cycle of conditional loans. For one member to obtain the loan, the previous receiver has to pay regularly back. The group exerts surveillance on each member, helps in coping with difficulties and reduces to zero the "idle" time, when the money paid back remains in the institution before being given to a new borrower.

To compete with them, other institutions are offering individual loans, but they should have mechanism to cope with the higher monitoring costs and the (potentially) worse portfolio at risk.

key success factor

Is the recruitment policy of the micro finance institution, which should select people caring about the broader goal of the organization, willing to constantly upgrade their technical and relational competences, and honest. A special monitoring system should indeed be in place to check for dishonest appropriation, which is relatively easy in the business. Technology should be applied to record transactions, but crucial is the organizational double check of clients and employees.