Increase in first-time loan amounts / Members Loan Fund deposit

Discussion in 'Announcements' started by Julia Kurnia, Sep 22, 2015.

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  1. Julia Kurnia

    Julia Kurnia Director, Zidisha Zidisha Staff

    About six weeks ago, we began piloting a new approach to credit risk management: allowing first-time borrowers to start with larger loan sizes, in return for a larger deposit into the Members Loan Fund (a fund which is used to refund lenders for loans that go into arrears). You may read the original announcement of the pilot here:

    Since then, we have gradually raised both the first-time loan size, and the amount of the Members Loan Fund deposit. These changes are not retroactive: anyone who has already made a deposit into the Members Loan Fund will not be asked to pay more. Likewise, the increase in first-time loan size does not affect the credit limits of members who have already raised their first loan.

    While it's too early to draw conclusions about long-term performance, the early data we have so far suggests that the new pilot loans will have similar, if not better, repayment rates to the old system of smaller loans with smaller Members Loan Fund deposit.

    The main benefit to increasing first-time loan amounts is that it allows our members to access substantial sums of capital more quickly. Under the previous system of limiting new members to $50 loans (or $100 if invited by current members in good standing), it could take as long as a year for members to work up to a large enough loan size to make transformative investments in their businesses or education. Under the new pilot, first-time borrowers may raise $150 - $200, allowing them to access substantial amounts ($300 - $400) as soon as their second loan.

    The original reason for limiting first-time loan amounts to $50 was to control credit risk: we have learned with experience that by far the best predictor of an applicant's repayment performance is the timeliness of first-time loan repayments, and one of the best ways to protect our community from fraud is to avoid disbursing too much cash to first-time applicants. By keeping the cash received from the first loan small and making future loans dependent on timely repayment of that first loan, we were able to keep repayment rates high without the expensive in-person vetting and repayment followup that are practiced by traditional microfinance services.

    In February this year we began piloting a new loan policy: in return for unlimited zero-interest loans, each borrower was asked to make a one-time deposit into a Members Loan Fund that is used to protect lenders from lending capital losses. This was successful in that lenders' funds were more sustainable. It was fairer in that any member who did not repay their loan bore most of the cost of their default, and most of the benefits accrued to responsible members who went on to raise many zero-interest loans of increasing size. By making our service less attractive to loan applicants who were not sure of repaying their first loan and qualifying to raise more, it helped ensure that those who did apply were people who intended to participate in our community responsibly over the long term.

    The Members Loan Fund also raised the possibility of fulfilling one of borrowers' most frequent requests - larger first-time loans - without increasing credit risk for lenders. As we began to pilot this approach, we raised the amount of the Members Loan Fund deposit in line with the increases in first-time loan amounts.

    The main reason for increasing the Members Loan Fund deposit has been to maintain the limited net cash disbursement for first-time members that we have learned is necessary to control credit risk. A secondary reason is to help balance supply and demand. At the moment, growth in new loan applications is outpacing growth in lending capital. Increasing the Members Loan Fund deposit amount helps restore balance and drives growth by making more capital available to fund new loans.

    In the coming months, we will likely continue to adjust first-time loan sizes and Members Loan Fund deposit amounts in response to new performance data and the balance of lending capital supply and demand. We will continue to follow the principle that anyone who has already made their one-time deposit into the Members Loan Fund will not be asked to pay any more. We will also continue to make certain that nobody has a Members Loan Fund deposit deducted without their understanding, by requiring new members to type out consent to the deposit amount, net disbursement amount and repayment amount before applying to join, posting a loan application and receiving the first disbursement.
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