Ahead of FTT Lending 3.0 2023, I caught up with one of our Rockstar speakers Tracey Horner, Head of lendwithcare, to discuss all things microlending…
Microlending and microfinance, like all financial processes, has its champions and its critics. How is lendwithcare different from its peers?
There are a number of ways that Lendwithcare is different from many other microfinance lenders. Firstly, we are part of the wider humanitarian organization, CARE International. As such we remain focused on the impact on poor people’s lives so the mission drift seen in parts of the wider sector does not come into play. Secondly we do not charge interest to our local partners, although as I will come onto, most of our local partners do need to charge interest to their clients to cover their costs. This means that our local microfinance partners do not have to cover the 5-10% interest they would incur when borrowing from some of the large microfinance investment funders. Being a peer-to-peer/crowdfunding initiative that raises funds from supporters, whether they be corporate, foundation or individuals lending on an altruistic basis allows us to both retain our policy of not charging interest to local partners and to adapt our model to lend to non-traditional organizations. For example, when we launched Lendwithcare we only loaned to registered microfinance institutions, whereas now we also lend to social enterprises like Doselva in Nicaragua who is supporting small-holder farmers to grow more valuable crops in the form of spices and therefore run profitable businesses, or Solar Aid who provide solar lamps in Malawi and Zambia.
Last time we spoke you touched on the issue of high interest rates in the microlending sector affecting its overall reputation. What do you think needs to be done to alleviate this?
Due to the relatively high rates of interest charged by some microfinance providers, this topic has understandably received quite a lot of attention over the years. However, whilst I would say that it is really important that the cost of borrowing is carefully scrutinized, especially since the vast majority of the world’s microfinance customers are low-income and marginalized, the predatory practices of a few have come to tarnish the whole sector rather unfairly. For me, the key areas for focus when it comes to interest rates are understanding why it is more costly to deliver (and therefore receive) microloans, and ensuring that the prices set by microfinance providers are reasonable, fair (given the context) and transparent.
In answer to my first point around why microloans tend to be more expensive; this is simply because the cost of delivering finance and training to communities that are hard to reach, and to provide thousands of very small loans, is very costly. Each small loan that is given requires an assessment of the recipient’s capacity to take on the loan, a business appraisal to ensure the loan is being invested into a viable income-generating activity, and in-person verification which usually includes home/site visits. Most good microfinance providers also provide follow-up training and support with their loans. All these things take time, use resource and therefore cost money. Not to mention that a lot of microloans are provided collateral free, which means that the risk of lending is even higher for microfinance providers. This is precisely why commercial banks do not serve these communities. For organisations that are just driven by their profit margins, microloans simply do not make good enough business sense. Secondly, it is worth noting that a lot of microfinance providers are operating in economies with very high rates of inflation (although I do recognise that the rate of inflation in the UK is incredibly high at the moment) and so the cost of delivering services is expensive.
Understanding this context is key when discussing the high interest rates of microfinance providers. However, what is absolutely critical for the end user is that these prices are reasonable, fair and transparent. When Lendwithcare is choosing a new partner to work with, we spend a lot of time assessing these elements. We look at who is the intended customer of the microfinance organisation (rural/urban, individuals/groups, male/female, poverty levels etc), how do their charges compare to other like-minded organisations, what other services do they provide alongside the microloan, how suitable/flexible are the terms and conditions of the loan and what types of loan products do they offer. All of these elements help us to understand whether the costs make sense but also to see how well embedded their social mission is. Is the organisation driven by the desire to have a positive impact on people as well as make enough profit to be sustainable? And so the last element, which is absolutely critical in terms of ensuring you have a positive impact on people, is making sure all costs (not just the rates of interest) are clearly stated and explained to customers before they take a loan. This would include being upfront about all the different charges a customer may face over the course of the loan (interest, admin fees, insurance, mandatory savings etc) and providing the customer with a total amount they will repay at the end of the loan term.
This is a topic that I could spend a lot of time discussing and I acknowledge that the practices I have described above will not match every type of microfinance provider out there, for the sake of time I have had to generalize a bit. I also recognize that a lot of changes have been made in recent years to digitalise and automate operations to increase efficiency and drive down costs. However, this is the experience of most of Lendwithcare’s partners and the approach we take as an investor. It is also worth noting that some microfinance providers (like our partner in Pakistan for example) do not charge any interest at all.
Over the years you’ve partnered with the likes of Hogan Lovells LLP, Ashurst LLP, Jimmy Choo, Heathrow Airport and The Co-Op. How important is partnership when it comes to lending, micro or otherwise?
Partnerships with companies are vital to our ambitions to scale Lendwithcare beyond the current lending level of around £6 million a year. As I mentioned above, Lendwithcare is an initiative of the wider humanitarian organization CARE International and as a charitable organization we do not have the funds to invest in growing Lendwithcare as fast as we would like to.
We believe that financial inclusion is key to reducing poverty and if we are to end extreme poverty and have ambitions to scale Lendwithcare to enable more low-income entrepreneurs to access the credit they need to grow their small businesses.
Working with the Corporate sector we could help many thousands more low income people in developing countries to achieve financial inclusion.
In addition to financial support we rely on the pro bono services of legal firms like Hogan Lovells and Ashurst for which we are extremely grateful.
We would very much welcome any companies or foundations who want join us in investing in entrepreneurship to help poor people reach their full potential to get in touch.
Financial inclusion and increased representation are key themes for FTT Lending 3.0. How can microlenders strike the balance between customer care and profitability?
For us, the best microlenders place equal importance on people, the planet and profitability. And recognize that if you do not have management systems, processes and products that are socially responsible, ethical and inclusive then this is likely to have a direct impact on your profitability. We seek to work with microlenders who have a good understanding of the financial needs of the communities they serve and who design appropriate and affordable products based on this understanding. Designing appropriate and affordable products is not only key to customer retention and recruitment but it is vital in terms of avoiding bad debts.
Included in the people part of this must also be the staff of the microfinance organisation. If an organisation does not treat its staff responsibly (through employee rights, decent pay, effective feedback mechanisms etc) then it runs a high risk of being exposed to fraud, poor customer care and inefficiencies.
And finally, it makes good business sense for microfinance organisations to be proactive in the green microfinance space. Not only does financing environmentally-friendly activities and technologies enable a microfinance provider to diversify their offerings, it also helps build community knowledge and resilience to future climatic shocks and stresses that their customers are likely to face.