Rolling the dice

I like the idea of a simple bet of 25$ on a client but I think we first need to establish the goals of our loan program before we decide on how it will operate.  If our main objective is to establish a sustainable loan program (in which interest covers costs/lost loans) than our bets must payoff far more than they succeed in order for the interest we make on paid back loans to cover Ana’s salary and our lost bets.  We need to calculate what this percentage of good bets to bad bets must be in order for this screening method to be sustainable.  I fear that we must ‘get lucky’ on more than 9 out of 10 potential clients in order for us not to consistently lose money this way.  Is this reasonable?

If our main goal is to reach as many impoverished people as possible than the 25$ bet may indeed be the best screening method available to us.  It also may allow us to collect valuable data over time regarding the credit needs, actions, and consequences of the poor.  However, I fear the likelihood of repayment will decrease as the numbers of clients grow unless we are able to provide the same individual attention through Ana and CCC as we are currently.  So if we are trying to reach as many people as possible the 25$ bet may become more and more costly as the number of clients grows.

So even if one of these goals is determined to be more important than the other, both seem to need an added component to increase the likelihood of client repayment.  I like the idea of current client recommendation for new clients.  My only reservation with this method would be if current clients realized how easy it would really be to take money from us and passed that information on to a friend in need.  Hopefully the current client values access to our programs and future loans enough to repay and would encourage their friend to do the same.  We could also add a slight penalty to the recommender if his/her recommended client fails to repay the loan.  I think this should be very minor, like ceasing their potential loan progression for a given time period or more dramatically not allowing them to take out another loan for a month or so.  My hope would be that this small penalty would not discourage too many recommendations but give the recommender some interest in seeing their friend succeed in their repayments.  If the new client also knew their delinquency would hurt their recommender they would work harder to ensure that did not happen.  I believe these recommendations should be very simple to minimize disincentives, essentially just a signature or formal verbal vouching from a current client for a new one.  I think this method would increase the likelihood of new client repayment while adding little cost and avoiding more complicated screening methods that would discourage many potential clients.

The 25$ bet combined with a simple nod of approval from a current client (perhaps with small punishment possibilities) would ideally allow La Ceiba’s client base and loan program to grow sustainably in order to effectively reach as many impoverished people as possible.

One Response to “Rolling the dice

  • Thanks for the comment/suggestions. I think the goal of the personal loan program is the same as the mission/vision of La Ceiba as a whole. While it is difficult to navigate the tradeoff between serving the “poorest of the poor” and being sustainable, it is not an impossibility.

    My only issue with the suggestion is that creating a penalty for a good client who recommends a potentially harmful client could cause many potential problems. 1) it could potentially cause animosity between members of the community & 2) would be a disincentive for good clients to recommend, not wanting to be penalized.

    As a member of loan team, I personally don’t feel comfortable penalizing a client for something out of their control. The repayment behavior of a friend is not their responsibility, but if they are being punished for it they may feel burdened to pay the loan for them, etc. It is the same reasoning why we do not offer group loans.

    Thoughts? –Loans

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