At Women’s World Banking’s Making Finance Work for Women Summit in November, three leading financial institutions gathered to discuss how individual lending methodology has impacted their business strategy and ability to reach women clients. In conversation with moderator Jennifer McDonald, Director of Product Development at Women’s World Banking, were Alfredo Osvaldo Zamora García of Compartamos Banco (Mexico), Samit Ghosh from Ujjivan Financial Services (India) and Amir Nafie of Lead Foundation (Egypt).
Traditional microcredit, as pioneered most notably by Muhammad Yunus, uses the group lending methodology in which borrowers form groups and are held liable for each other’s repayment. Under this model, creditors rely on mutual accountability and strong social networks in place of collateral and credit history. The individual lending methodology, on the other hand, is an approach tailored to the specific needs and repayment ability of one borrower.
Despite operating in widely different markets, all three institutions share a common trait: they are part of a global shift away from group lending toward more individual lending. In each case, an expansion of individual lending contributes to strategic business initiatives and enables the institution to better serve women clients.
Why individual lending? – Serving distinct market segments
Alfredo perceives group and individual lending as methodologies that address the needs of distinct market segments, and thus serve different purposes. Group loan clients tend to own small-scale and itinerant businesses, such as selling bread and fruits. They typically lack collateral and formal documentation of their business operations, making them well-suited to the low barriers to entry of the group lending model. Individual lending clients, on the other hand, tend to have more formal and organized businesses, hence more likely to have credit history and documented business activities. These clients often seek larger loans to help grow their businesses, while group loan clients use smaller amounts of credit to cover consumption expenses. In Compartamos Banco’s view, offering individual and group loan products allows the bank to tap into two different market segments, serving each of their unique needs more effectively.
Why individual lending? – Building relationships with clients
For Ujjivan, individual lending is an opportunity to continue strengthening relationships with its existing customer base, especially those clients whose needs are no longer satisfied by a group loan. According to Samit, group loans comprised 90% of Ujjivan’s portfolio in 2011. However, branch staff observed that many clients were leaving the institution when the loan amounts offered were no longer sufficient to serve their needs. At 73%, Ujjivan’s customer retention rate was only just above the industry standard. In order to improve client retention, Ujjivan introduced the individual loans so clients who have “graduated” from group loans can subsequently apply for a larger loan that is also more tailored to their particular circumstances. This initiative has enabled Ujjivan to build stronger relationships with clients and remain their financial institution of choice as their lending needs evolve.
Why individual lending? – Focusing on women’s needs
In Egypt, the traditional culture discourages women from taking out loans. For Lead Foundation, improving the percentage of women in its portfolio involved introducing a credit product designed to meet the needs of women. Amir shared that Lead’s customer research had revealed a distinct segment left unserved by both individual and group lending. Since Egyptian women face societal pressure when taking out a loan, women value the privacy that an individual loan offers but often cannot meet the minimum collateral requirements. To address this gap, Lead introduced a “woman’s loan,” with a smaller loan size and less collateral requirements, but that still provided the individual privacy important to women clients. According to Amir, the product has so far been a great success: Lead’s percentage of women clients has increased from 18% to 37% since its launch. Interestingly, Lead found that reducing collateral requirements also improved male clients’ uptake of individual loans, adding further value to the institution’s overall portfolio.
These three case studies show that individual lending can help financial institutions across a variety of regions capture a larger market share, enhance existing customer relationships, and most importantly, offer a diversified suite of products to enable women clients to build greater security and prosperity.
For more on individual lending, watch the video of the full panel discussion or check out Women’s World Banking’s recent publication, “Individual Lending for Low-Income Women Entrepreneurs: An Inclusive Approach.”