Microfinance Institutions and Salary Based Consumer Lending

This document draws on the experience of MicroSave's Action Research Partners (ARPs) to discuss microfinance programs that provide consumer loans to low income salaried workers. The paper argues that:

• These loans represent a low-risk, high return opportunity;
• There is a move away from a direct relationship with clients, to a direct relationship with employers;
• The demand for loans can quickly outstrip funds;
• Risk management is the key to profitable salary based lending.

The paper goes on to discuss the following risk management strategies used by ARPs:

• Using pilot testing to identify operational constraints and the necessity of efficient banking information systems, reporting and internal controls;
• Managing employer relationships, including:
  • Careful selection of employers;
  • Establishment of clear guidelines about the relationship.
• Controlling repayments by ensuring that salaries are paid by the institution rather than the receipt of deductions;
• Ensuring provision of affordable loans to customers;
• Strengthening credit control and administration through:
  • Credit analysis;
  • Process mapping and compliance.
• Using technology to reduce risk;
• Anticipating collection difficulties.

The paper concludes that:

• A decision to move to salary based lending is not a foregone conclusion;
• If demand is to be met at an appropriate risk, institutions need to give careful thought to:
  • The availability of funds;
  • Management of risk;
  • Collection methodologies;
  • The creation of new business relationships.