Principles of Financially Viable Lending To Poor Entrepreneurs

This report argues for:

• Short-term loans that are compatible with enterprise outlay;
• Sustainable lending by small and repeat loans, allowing credit to support financial management as a process, not as an isolated event, and substituting for pre-loan project analysis and formal collateral by assuming that clients will be able to repay;
• Concentrating on providing motivation to repay. Institutions that successfully motivate repayments also develop staff competence and a public image that signal that they are serious about loan collection;
• Employing joint liability groups where a handful of borrowers guarantee each other's loans. This technique has proved effective in many different countries and settings worldwide.

The report also acknowledges that small loan sizes necessary to serve the poor may result in costs per loan which require interest rates to be significantly higher than commercial bank rates (though significantly lower than informal sector rates). However, poor entrepreneurs have shown willingness and ability to pay interest rates, higher than commercial bank rates, for services with attributes that fit their needs.