How to Reduce Arrears in Microfinance Institutions
It is crucial to reduce arrears if the microfinance institutions (MFIs) are to achieve self sufficiency. MFI staff must understand the causes of arrears, e.g.:
- Client testing of the MFI's determination to collect repayments;
- Crises in client's lives;
- Excessive loan size;
- Favoritism in providing loans.
According to the author, analytical tools for assessing and preventing arrears include key measures for analyzing arrears. Some of these that he uses are portfolio quality ratios and performance ratios by credit officer, and financial ratio tests for determining the appropriate loan size. The key to reducing arrears is to:
- Follow up quickly the late loans;
- Form strong solidarity groups;
- Update and enforce credit policies;
- Limit the outreach responsibility of each credit officer to a specific geographic region;
- Avoid lending to start-up businesses;
- Provide financial incentives for credit officers.
The author suggests that in critical arrears situations, MFIs should suspend lending to new clients until the institution's portfolio quality improves. In order to design appropriate strategies to pursue, the MFIs should also ascertain their clients? ability and willingness to repay. The author concludes that:
- MFIs should ensure that their clients understand clearly that arrears will not be tolerated;
- MFIs' policies and procedures should be clear and effective;
- MFI management and credit officers should pay attention to details and respond quickly to problematic clients.
[Adapted from the author]
