Games Loan Clients Play

This note discusses tactics used by clients of financial services to improve their access to loans. It offers suggestions for MFIs and banks to deal with or prevent these tactics.

Clients employ several tactics to test controls, exploit weaknesses in the system or test the institutions capacity to live up to its promises. The note identifies these tactics in individual and group lending methodologies, and suggests measures to counter them. Recommendations include:

• Conducting internal and loan portfolio audits;
• Introducing flexible repayment periods to ensure that clients have manageable loan sizes;
• Monitoring performance of individual members within groups;
• Checking business license and proof of ownership;
• Understanding and responding to customer needs;
• Allowing clients to take more than one loan at a time;
• Introducing measures to establish existing indebtedness;
• Verifying existence of real cash flow;
• Introducing incentives for prompt repayment, and initiating court action as last resort for defaults;
• Monitoring staff regularly;
• Inculcating organizational culture of integrity;
• Establishing strong management information systems.