Published by Accounting Forum, Vol. 31 No. 1, March 2007, 25 pages, available by subscription through Science Direct: doi:10.1016/j.accfor.2006.11.005.
The apparent shift of microfinance institutions (MFIs) to commercialization is characterized by the increasing importance that donors place on factors like repayment rates, good loan books, and client numbers. However, in looking at institutional sustainability, research has generally neglected the key role of field workers or loan officers in interfacing with the poor. The existing literature on loan officers in MFIs is limited and mostly concerns the geographic area of Asia, while other regions, especially Africa, remain relatively under-researched. Instead, most macro-evaluations of microfinance projects conducted throughout Africa have focused on, among other topics, impact assessment and client outreach, which generally have reported disappointing performance. The paper at hand contributes to previous research in that it seeks to promote greater understanding of the importance of loan officers through a case study of a failing MFI in Zambia.
The study is based on a period of intensive qualitative research conducted in 2003 at the MFI Christian Enterprise Trust of Zambia (CETZAM). Findings are derived from a combination of observations, semi-structured formal interviews, internal meetings, focus groups, and informal discussions with loan officers, clients, immediate supervisors, and senior management.
CETZAM was founded in 1995, funded by the British Department for International Development (DFID) through a GBP 2.29 million (USD 4.71 million) grant over a 5-year period from February 1998. It offers its clients three types of loan products, two of which are delivered through a group-based lending methodology, namely the Trust Bank and solidarity group, and the third of which is an individual loan product. Through the group-based lending methodology, borrowers form groups which jointly share liability for loan repayment. The Trust Bank group members guarantee one another’s loans ranging from USD 80 to USD 200. In addition, these self-selecting groups are expected to elect group leaders to take responsibility for managing its activities, including loan accounting. The loan officer’s intended role is to assess the eligibility of potential clients, visit their businesses (which included food vending, retail, tailoring, and chicken rearing), and train them in CETZAM’s lending methodology for ten weeks before disbursing loans. Eventually, the work of screening, monitoring, and enforcement of repayment are to be progressively transferred from the loan officer to the group’s own members.
Results show that CETZAM had an impressive start during the first six years of its operations, from 1998 to 2003 with repayment rates of over 98 percent and low percentages of both portfolio at risk (PAR) and portfolio in arrears. By 2001, CETZAM had opened twelve branches and by 2002, its borrowers numbered over 16,000. However, by the end of 2003, its PAR 30 days and over stood at 30 percent while portfolio in arrears at 30 days and more reached 22 percent. The calculated cost per dollar lent also rose from USD .91 in 2002 to USD 3.14. The number of borrowers fell to less than 5,400 and CETZAM reduced its branch operations from twelve to seven and the number of loan officers from 85 to 28 by December 2003.
Dixon et al. found that because loan officers had to report to both management and clients, they are often faced divergent expectations from each side. On the one hand, loan officers were pressured to reach targets set by the MFI, for example zero arrears, as management asked them to be more assertive in loan collection. On the other hand, they also had to establish rapport with the clients, who expected them to be patient and understanding. Under management pressure, loan officers often reported emotional stress as they took on tasks that, in the original group-lending model, group themselves should have performed, especially with regard to loan recovery and accounting.
As a consequence, loan officers frequently resorted to inappropriate means of recouping loan repayment. One method they employed was threatening to seize the loan security fund (LSF), which was the savings fund owned collectively by the group. Another practice was to use external agents, for example police officers, who not only confiscated household items to sell in order to recover the money, but also served as a public signal of the social consequences of default. A third option was paying defaulters home visits at dawn and dusk to ensure that they could not hide.
The implications for the tensions that both the loan officers and the clients experienced are serious. Because the loan officer’s role changed from that of a group facilitator to that of a debt collector, they had to spend more time and energy pursuing defaulters, which sidelined their other duties, which included marketing the loan product, facilitating the formation of new groups, and making timely loan distribution to good borrowers. The focus on reaching benchmark numbers and the consequent actions that the loan officers resorted to in order to reach targets not only undermined the base of client loyalty and trust, but also impeded new client solicitation and outreach expansion.
While Dixon et al. notes that while this study is limited in the generalizability of its findings, it is still increasingly representative of emerging MFIs in both Africa and elsewhere. The findings demonstrate that benchmark numbers, which usually serve as the basis of evaluation by both donors and third-party evaluators, could potentially be concealing other problems, especially at early stages of development. The authors call for MFIs to seek a more in-depth understanding of the dilemmas and challenges faced by loan officers, which would enable the institution to more consistently advance lending work and meet targets in the long-run.
By Mary Fu
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