An Appetite for Credit: A Study of Product Innovation by Pro Mujer Peru
This study is part of the Assessing the Impact of Innovation Grants in Financial Services project, undertaken by the IRIS Center at the University of Maryland and its partner Microfinance Opportunities. The goal is to assess the impact of grants provided by the Bill and Melinda Gates Foundation (BMGF) to microfinance organizations for the development of innovations in financial services.
The purpose of this investigation is to examine how Pro Mujer Peru's (PMP) clients have used and continue to use BMGF-funded credit innovations. More specifically, the investigation concerns one innovation, the Premium loan, PMP's largest loan ever offered, with a longer term, less frequent payments, and lower interest rate than PMP's Regular loan product. The loan is targeted at (and limited to) PMP's longer-term, more successful borrowers—a bigger loan to meet the needs of bigger borrowers.
The study was based on a series of individual interviews with current Premium clients in the southern Peruvian cities of Puno and Tacna. In our sample, we found on average a group of middle-aged women with less than a complete secondary education. They tended to stand out from their peers, at least compared to other PMP clients, in terms of the scale and relative success of their businesses. We found very little indication that these women had been born into advantage.
Their most common motivation for seeking the Premium loan was that they simply wanted more capital for their businesses, and the Premium became a new vehicle for doing that. Many cited the loan's longer term and slightly lower interest rates as reasons for preferring it over other PMP products, but the difference was not such that they discontinued their use of the other products. They also favored the obligatory savings policy, which compelled them to save somewhat more than they were saving with just the Regular loan.
In nearly every case, these clients realized their plans for the loan, which is to say, nearly all of the funds went directly into business investment. Most clients (about 2/3) reported some kind of economic shock in the past year, but they were able to use other resources—ongoing earnings, savings, or other credit in some cases—to compensate for these shocks (only 5 percent of the initial sample applied Premium funds to a shock, as compared to over 50 percent that applied ongoing earnings to a shock). Almost no one employed Premium funds for household expenses (though other enterprise loans were diverted for household use on occasion).
The Premium loan was just one part of their broad credit and cash-management strategies. On average, Premium clients had taken out 5-6 separate loans over the past year. There were varying degrees of overlap in these loans. The average total credit over the year was just over $5,000 in Puno and just over $5,400 in Tacna. Premium loans taken up by clients in the past year comprise, on average, less than one-third of their total credit obtained. The Premium loan combined with all other PMP credits comprised 56 percent of total borrowing in Puno and 68 percent in Tacna.
Sometimes the Premium loan provided a boost that significantly raised the scale of a client's business or propelled the client into a new business. Sometimes the Premium loan was one new element in an ongoing business plan that did not depend on any one particular loan. There was no evidence the Premium loan changed clients attitudes regarding business expansions or upgrades. For some, the loan was a new way to realize expansion plans, but generally those plans pre-dated the loan (using credit to follow opportunity, rather than vice versa). Moreover, many clients had made investments/upgrades as big or bigger using other credit in the past.
At the same time, the Premium loan had a clear net effect on the total amount of capital in circulation among these clients. As noted above, the Premium represented about 30 percent of the total credit taken out by clients over the past year, but most evidence suggested that this was 30 percent of additional credit, rather than credit substituted for other loans sought in the past. Nearly all clients sustained their pre-Premium borrowing habits at PMP, which is to say, they sought out all available Regular and Seasonal loan as they added the Premium to the mix. Likewise, there was little indication that taking the Premium loan made them any less inclined to borrow from other institutions.
The dominant pattern of business investment was loan patching. The Premium loan was taken up simultaneously or in sequence with other credit and applied toward the same purpose of business investment. One might describe the pattern as one of "maxing out" PMP resources, meaning most clients took out nearly every possible loan from PMP over the course of the year, usually including the Premium, Regular, and Seasonal loans. Also, over 80 percent had taken up a loan with a competing institution that overlapped with the Premium loan.
About half of respondents reported increased profits, compared with years past as a result of taking the Premium. This finding is consistent with the prevailing attitude among clients that increased profits hinge on increased capital for investment; the Premium loan was a new source of capital and hence a new basis for profit this year, as compared with past years.
All clients were engaged in obligatory savings connected to the Premium loan, which generally meant that their overall savings levels were increasing (the sums saved with the Premium were on top of ongoing obligatory savings with the Regular loan and, in some cases, competitors' group loans). Beyond PMP, only about one-third of respondents had voluntary savings accounts, and only about 20 percent had voluntary savings accounts with formal financial institutions (the rest saved at home).
This savings increase was noted by many as a pleasing feature of the Premium loan, who saw it a productive way to amass resources over time. The obligatory nature of it, coupled with PMP's relatively liberal policy on withdrawals, was seen as critical. Simply put, these clients like to be forced to save, but also wanted reasonable access to those savings when they needed them. One can speculate that voluntary savings is difficult for this group, who may face a variety of familial and societal pressures that undermine their capacity to save voluntarily.
The initial observations on savings inspired a follow-up investigation in June 2009, which combined MIS analysis with more tightly-focused additional interviews. We found that about 3/4 of Premium borrowers in the sample supported the obligatory savings policy, most often for one or both of two reasons: 1) they liked being forced to save; and 2) many distrusted commercial banks. The study also found that 80 percent of the Premium client base overall was leaving more than necessary in these accounts, as compared with 56 percent Regular loan borrowers (average surplus for Premium borrowing was around $60, with subpopulations at considerably higher levels). Once withdrawn, uses ranged from entertainment funds to longer-term business investments.
At the same time, the follow-up visit showed that the utility of these accounts was undercut by the potential for involuntary appropriation by PMP when payment problems develop in the loan groups. Such appropropriation is part of PMP's group loan methodology that lay mostly dormant until recently, when Peru's economy weakened in 2009.
The change in the economy and implications of this policy were striking in the follow-up visit, as compared to the initial visit. Initially, about 20 percent of the sample mentioned "recession" in some form, but defaults in Premium groups were virtually non-existent. Upon return in June 2009, about half of the sample reported drops in business revenue ranging from 20 to 50 percent. Relatedly, 55 percent of the sample reported serious economic problems within their loan groups, with defaults occurring or imminent. In these scenarios, some substantial savers we interviewed had seen their savings evaporated or frozen to cover others' defaults.
Questioning extended to gender dynamics and whether any changes in the role of women in the household could be correlated with the appearance of the Premium loan. None could be reasonably linked to the loan. The lack of transformative effect reflects the fact that most of these women have access to a wide matrix of credit, where the Premium represents a significant but not landmark component.
The study answered some questions about these clients, while opening others. Key takeaways include:
- Mandatory savings — These clients are viewing mandatory savings in an unconventional way, bolstered by the relatively liberal withdrawal policies of PMP. The savings has transformed into a usable resource in several different ways, both short- and long-term. It is an interesting counterpoint to the increasing calls for the encouragement of voluntary savings products. At the same time, confidence is undercut when the funds are appropriated to cover loan defaults; MFIs like PMP face a difficult choice between encouraging savings or sustaining their current group-loan methodologies.
- Rethinking "graduation" — A common concern among MFIs is that their best clients will become so successful that they leave to seek larger loans with commercial competitors—in a word, "graduating." This study complicates the notion of "graduation" because many clients in fact "graduated" in the conventional sense (i.e. sought bigger loans with competitors), but they retained the smaller loans at the same time.
- Valuing the intangibles — Many Premium clients are continuing to borrow from PMP when they can and do borrow much larger loans (with better terms) from competitors. Their motivation is mostly the friendships and social capital of their long-term loan groups at PMP. The case clearly shows that clients operate with multiple drivers of choice in their borrowing.
- Loan patching and risk-aversion — Would these clients be better-served if PMP raised its tolerance for risk and were willing to deliver $5,000 in a single loan? Would institutions like PMP benefit financially? There are arguments to be made on both sides of the issue, and these clients provide prime substance for the debate.
- A complicated view of transaction costs — Lowering transaction costs is a central concern of the present microfinance industry. Yet we must acknowledge that transaction costs seem to have no decisive influence on the borrowing patterns of some clients, who take big bank loans but still maintain their (smaller) group loans for the social capital. Again, the case demonstrates clearly that there are multiple and overlapping drivers of choice in borrowing patterns.
These components, in turn, will be joined with the other elements of the overall impact study. Our goal will be to combine different methods and different moments in time to deliver a composite portrait of how and why conditions change. The expectation is that the results will contribute significantly to the learning agenda of BMGF and the field of microfinance in general.
