Rethinking Personal Loan Screening Methods

After the presentation on Thursday I walked away with a new appreciation for the loan team and the dilemmas they face as a rule-making and agenda setting group for the future of La Ceiba’s loan program. The unique approach we take to administering loans makes the issue of eligibility a perplexing one. We discussed many ideas, but the one that jumped out at me because of the necessity for creating sustainable loan criteria was choosing the mechanism that would supplement what Ana (or any future loan officer) does in screening candidates by the personal knowledge of who they are. One idea heavily debated was the idea of community recommendation and considering, in a way, their personal reputation in the community. After looking at the breakdown of the various MFIs requirements I noticed that only one MFI (Amhara Credit and Savings Intuition) really got at the issue of community recommendation in the way that we were discussing. I was curious as to why ACSI chose this method and how it makes them unique. Details of their operation revealed that a potential client must have a good reputation among the community that can be confirmed by the local credit and savings committees as well as the staff at ACSI. This lends to the belief that the actual recommendations by the community members on behalf of prospective client don’t really hold much weight unless they are confirmed by a third party. This leads to our dilemma: if we choose a method of community evaluation similar to this one, presumably Ana or another loan officer would be the third party check on the community’s recommendation. However, my question is why ACSI doesn’t leave the recommendations to the community without the oversight of a secondary committee (which right now, for LC, would only be Ana). Perhaps there is something about the dynamic that this possible evaluation method creates that may have an effect on more than what we can see as outsiders.

My concerns with the idea of community evaluation are not with their merit, because I do think they would be very valuable in helping to screen candidates. My concern lies in the dynamic that the implementation of this screening method may create. We discussed the possibility of convening current clients (regardless of their repayment status?) to submit an anonymous vote on prospective clients. While I agree that the anonymity of this setup liberates the current clients from considering more than just the facts about the individual’s repayment potential, there is the possibility that a divide may be created between the rejected clients and La Ceiba clients. This results in the potential for animosity or embarrassment. In turn those feelings may create a, in the worst case scenario, possible retribution against existing LC clients which would in no way help the community, the client, or LC.

 I stress the word potential because there is no guarantee that this method will create any of these feelings. It is possible that the closeness of the community leaves little room for privacy in financial matters anyway. Additionally, maybe the pressure of this peer scrutiny will incentivize teamwork and cooperation within the community. Knowing that the prospect of admittance is in some way tied to community responsibilities may be motivation enough to take steps in becoming a financially viable candidate, which presents a winning combination for the community, LC clients, and LC as an MFI.

If we conclude that the LC client group vote is not a viable choice for the selection of prospective clients we should consider the prospect of convening a permanent committee of economic, community leaders to assist in the screening process. These leaders may be business owners, teachers, or religious leaders in the community. There role would be the same as that of the LC clients in evaluating prospective clients, but provided the distance in their personal proximity to the prospective client there arises two points of contention. One being the type and value of the evaluation the panel is able to provide; a weaker knowledge of the prospective client’s background and traits. Secondly, again, there is the potential for the creation of an inadvertent hierarchy between the recommenders and the recommended. Thus, allowing for the potential of division which I believe undermines what LC is trying to do for the development of the whole community.

Perhaps my fear of this is exaggerated based on my ignorance of community standards and institutions. However, again, I’m considering the potential divisions that may emerge as a result of creating a, what may be considered, unnatural grouping of prospective clients and established economic, community leaders.  

Another option we discussed was personal letters of recommendation by community members. I like this idea because it provides a strong, direct assessment of a prospective client, so assuming the recommendation is fair, and objective (which certainly will not be the case  all the time) we’ve ensured an in depth look at a client before they are screened by Ana or anyone else. An issue I have with this approach includes the willingness or unwillingness for an individual to provide information about someone of whom we don’t necessarily know the relationship between. With that, there is no way to ensure the accuracy or the objectivity of the evaluation, and chances are there are relatively few disincentives for someone who supports or depends on the prospective client to evaluate them in an unfavorable light. How valuable will the recommendations be, if everyone who provides them says that the prospective client is a wonderful choice. I think one way we can perhaps use this idea, and streamline the variations in answers we get is preparing, yet another, application, or template that has specific traits and or experiences that the recommender could use in their evaluation. We would create sort of the ideal candidate we are looking for, at least on paper, and ask the evaluator to consider those traits in their evaluation. That way we are actively participating in the structure of the screening process, yet giving the recommendation flexibility in its completion. This method of screening would add minimally more work to the loan officer’s work load as they would only be responsible for collecting the completed evaluation form. Another benefit of screening this way is that we are able to guide the recommenders in what we are looking for, forcing them to ask tough questions of the candidates while also reducing the time and effort they spend on formulating their own recommendation. One issue I foresee with this is the possibility of encountering illiterate recommenders in which case the paper form could easily be turned into an informational interview with the loan officer. Additionally, there is always the issue of incentive. Exactly what incentive the recommender has for evaluating a candidate is still unclear; unless they see the success of the prospective client tied in some way to their own, and even then the commitment to evaluating honestly and accurately isn’t guaranteed.

These are some ideas I’ve been mulling over since Thursday. I would like to discuss this with the loan group again, as I feel this is an issue that deserves time and attention for the sake of LC’s loan program sustainability.

3 Responses to “Rethinking Personal Loan Screening Methods

  • I too am not particularly fond of the voting method of current clients for new clients. This is not because I think individuals would be excluded, although it is an unfortunate side-effect, it is present in all forms of group loans. If you do not have a group, you cannot get a loan. A sad fact to be sure, but a fact nonetheless. After all, if that is the road we choose to go down, we want potential clients that our current clients would be willing to support and mentor. My problem with that method is that I believe it will cause a stagnation in growth. If we decide to move to a neighboring community in which few of our current clients are familiar with, people would be awarding their vote to simply award their vote, not because they are willing to take a vested interest in the new client. If you give individuals who do not have a lot of control in their own lives currently some level of control outside of their life, I can see them wanting to exercise that control even if they are not knowledgeable enough to make a proper decision. I think if we were to use this method, we would have to have multiple “boards,” one in each community, who would be able to vote on individuals they know. At that point I am not sure that this method is worth the effort anymore. The information and screening that we get from it might not out way the variable costs it derives.

  • Thanks again for putting some serious thought into this issue. I am against the idea of the group vote, because as you pointed out, I think there is ample room for feelings of hostility/jealousy to impede an otherwise worthy candidate from getting a recommendation. This is not a judgment of the character of our clients in LC, but rather a way to avoid creating any more problems that do not already exist for us in LC.

    I agree w. your self critique of the board of directors idea. I do think this would lead to a sense of hierarchy, and we do not want our clients to feel inferior. Also, what incentive do members of the board have to serve? We do not have the ability to pay them, so what makes it worth their while?

    I still don’t see the harm in a letter of recommendation, or even a written personal statement… what makes you a good candidate for LC? without being specific, what are your hopes for the future? How could receiving an LC loan help you? … thoughts?

    Thanks again — Loans

  • I meant to add- the only problem with creating a list of traits we would like to see in an ideal client, is could stray from our mission. We are serving the poorest of the poor, many of our clients wouldn’t initially be considered ideal in most respects, but do pay back in a timely fashion. How do we reconcile this?

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