Loan Calculator for Microfinance Borrowers

As I began researching microfinance in Nairobi a months ago, I visited a dozen websites of Kenyan microfinance providers. Some of these lenders provide a detailed description of their loan products and lending terms, but rarely are loan contracts provided for public or client viewing. 

Fortunately, I stumbled upon a unique tool on the website of U & I Microfinance Ltd that I think will help current and future microfinance borrowers. This microfinance lenders provide a loan calculator [1] on its website for clients to estimate loan costs. 

On the website of U & I Microfinance Ltd, consumers will find a loan calculator that can be used to calculate their principle loan amount, interest rate and repayment period to learn an estimated total of the amount owed and monthly repayment amounts. I urge those interested in a microfinance loan to calculate the costs of borrowing before applying for a loan and/or signing a loan agreement.

You can find this tool at the following website:

http://www.uni-microfinance.co.ke/Loancalculator.html

---

[1] Please note that the calculator only provides an "indicative value" that may not be exact.  

From Gender Inequalities to Band-Aid Solutions: The “Ten Commandments” for the Kenyan Microfinance Industry

In my previous blog post, I discussed the various gender inequalities that the Kenyan women with whom I worked and collaborated in the past often experience and how societal norms can impact their participation in microfinance. While I recognize that microfinance programs cannot change the gender norms of a society, staff members of microfinance programs can help to mitigate the risk that such inequalities bring upon the lives of women through the following ten suggestions that are assembled based on my own research of the Kenyan microfinance industry along with the recommendations of the Fairkampaign [1] and the SMART Campaign [2]. I argue that these suggestions can be called the “ten commandments” of Kenyan microfinance.

First, Kenyan microfinance programs should allow borrowers the opportunity to deferrer their loan or receive debt counseling in case of a financial emergency. None of the Kenyan microfinance programs that I am researching allow for this option. Grace periods should be offered for all loans according to the use of the loan.

Reason: Many Kenyan microfinance borrowers whom I interview discuss the fear that the price of living will continue to rise and their businesses will not earn enough profit to repay their loan. Also, many borrowers discussed the hardship of paying the loans of defaulters in their group that increases the financial debt of the other group members. Measures discussed above can prevent the default of the borrower.

Second, the staff of Kenyan microfinance programs should schedule training and mandatory meetings in consultation with its participants to make educational opportunities and program obligations easily met.

Reason: Many of the microfinance borrowers whom I interview discuss long working days with many responsibilities of work, family, church and community. Many explained that the mandatory weekly group meetings required by their microfinance program often take a whole day as borrowers often have to travel long distances and close their businesses to attend.

Third, Kenyan microfinance loan applications, contracts and other materials used by Kenyan microfinance programs should be offered in more than one language if more than one language is spoken by the population that the microfinance program serves.  Also, loan applications and contracts should be written in plain, simple language, and read and explained verbally to all borrowers and their co-guarantors. 

Reason: First, the Kenyan microfinance loan contracts that I have reviewed are written in technical, legal language that is not understandable to a person without an education or legal background.  Second, all of the Kenyan microfinance programs that I am researching only offer loan contracts in English, but many borrowers whom I interview speak only Swahili. When given the choice, some of the borrowers whom I interviewed chose an interview consent form written in Swahili rather than English. The choice should be left to the client.

Fourth, borrowers should receive copies of their loan contract before signing and a printed repayment schedule to ensure that the borrower can or a family member can help to review loan obligations and responsibilities at any time.

Reason: All of the Kenyan microfinance programs that I am researching do not release loan contracts to borrowers and rarely do such programs offer their borrowers a printed version of their loan repayment schedule.

Fifth, the total sum of the loan and all loan fees should be clearly itemized and explained on Kenyan microfinance loan contracts. Kenyan microfinance loan applications should also state what fees are refundable, if the application is denied or if the borrower decides not to sign the loan contract.

Reason: When I ask borrowers about the fees and interest rates of their loans, most borrowers cannot remember or do not understand the loan fees that are charged by their microfinance program.

Sixth, Kenyan loan contracts should state and explain the insurance policy of the loan, including whether the policy covers the death of the borrower, their spouse and their children, the disability of the borrower, along with fire, natural disaster and political violence affecting the business or home of the borrower. 

Reason: The Kenyan microfinance programs that I research have different insurance policies with different coverage. Some contracts only cover the death or permanent disability of the borrower. Other contracts cover political violence, fire and natural disaster.

Seventh, Kenyan loan contracts should clearly state the penalties for default, late loan payments and early loan payments. This includes monetary penalties, a time line of when and if the defaulter is reported to a credit reference bureau/organization, when savings can be confiscated by the microfinance program to pay arrears, and the procedures that the microfinance staff or group members can take to legally repossess the pledge security. 

Reason: The Kenyan microfinance contracts that I have reviewed do not clearly articulate the penalties for default, late loan payments and early loan payments. Also, the Kenyan microfinance borrowers whom I interview are often unclear about the repossession process and their legal rights to challenge.

Eighth, all Kenyan microfinance borrowers should be given a widow of time after signing their contract and receiving their loan to withdrawal from the loan contract. This option should be explained in all microfinance loan contracts.

Reason: Only one Kenyan microfinance program that I have researched allows for a borrower to withdrawal from their loan contract prior to receiving their loan and there is a monetary penalty fee.

Ninth, microfinance borrowers and clients should also be given the right to and explained by staff members how to communicate grievances anonymously. A “complaints resolution process” should be stated in the contract and explained verbally to borrowers and clients [3].

Reason: Many Kenyan microfinance programs have suggestion boxes in their branches, but according to interviews that I conduct with borrowers, clients rarely use them and many think that such a mechanism is ineffective.

Tenth, collateral (or securities) required for all microfinance loans should be determined only by the risk of the borrower with the suggested ratio of 1:1.

Reason: Kenyan microfinance programs often require borrowers to save two to three times their loan amount along with physical collateral (business or household items called chattel) that is equal to or more than the principle loan amount plus interest. Many of the borrowers whom I interview state that the fees and the security requirements for microfinance loans are often difficult to obtain, but they believe that accessing loans from commercial banks is even more difficult.

---

[1] The Fairkampaign is a Microjustice4All initiative. The Fairkampaign’s “Characteristics of Fair Contracting” can be found at http://www.fairkampaign.org/index.php?option=com_content&view=article&id=8&Itemid=8

[2] The SMART Campaign is a “global effort to unite microfinance leaders around a common goal: to keep clients as the driving force of the industry.” The SMART Campaign’s “Client Protection Principles” can be found at http://www.smartcampaign.org/about-the-campaign/smart-microfinance-and-the-client-protection-principles

[3] A “complaints resolution process” is the intellectual idea of the Fairkampaign.

Gender Inequalities As Depowering and Destabilizing Factors that Microfinance Providers and Lenders Don’t Consider

Through interviewing women borrowers, working in their businesses and homes along with analyzing my own experiences in several Kenyan communities served by microfinance, I became aware of how gender inequalities that women participants experience in their daily lives negatively impact their participation in microfinance.  My research contributes to the understanding of such descriptions and experiences of women that are often left out of microcredit program assessments.  Several of my thesis topics as an undergraduate are provided below. 

Gender Inequalities Impact on Microfinance Participation

-How does the unequal distribution of labor in rural households impact the ability of women to pay back their loan, and attend trainings and meetings required by the microcredit program? 

 

Women work extremely long hours due to their various responsibilities inside and outside the home. Daily activities that are common among the both urban and rural women include housework, such as cleaning and cooking, farming, children rearing, church and community based functions, and operating a business or more than one income generating activity. Most homestead responsibilities are on the shoulders of women. In the United States, researcher Arlie Hochschild called this phenomenon the “second shift” to allude to the fact that even though more American women than ever hold a paying job outside the home, women still perform the majority of non-paid household based work resulting in more working hours compared to men.[1]

As a result, the mobility of women is often limited due to their busy schedules and vast responsibilities that make it difficult for microcredit participants to tend to their obligations in the program. Common requirements of Kenyan microcredit programs include weekly meetings, weekly or monthly savings, weekly or monthly loan payment schedules and training. 

 

-How does the lack of education of rural women impact their understanding and utilization of training modules, loan agreements, and their loans? 

Compared to men, women have less access to educational opportunities including vocational training and formally schooling. Even though many of the women whom I interviewed are fortunate to learn their form of trade (business) from the female members of their family and community, most are illiterate and lack formal education or training. Such factors limit the ability of women to operate a well organized and functioning business, to understand written training materials and the complexity of loan contracts.

For example, the majority of Kenyan microfinance loan contracts are on average four pages that often include legal and technical jargon rather than plain language that may affect the ability of women to know their rights and hold the program accountable including grace periods, payment terms, collateral requirements and repossession processes.  

-How does the lack of land ownership and ability to control the use of land among rural women shape their ability to repay their loans? 

 

Less than one percent of Kenyan women possess a land title deed.[2] Such a gender inequality is a reality that affects many microcredit participants who operate their business in their home and on their homestead. Thus, the businesses of rural women are often vulnerable to the control of others, particularly male family members. Thus, their ability to utilize and repay a loan is not under their direct control. 

Amy, a borrower whom I interviewed, operated a small restaurant on the side of her homestead for traveling workers, but several months after taking a loan to improve her operations a male relative who owned the land took over the business. Even though Amy had no capital in invest in a new business, she had no choice but to start raising chickens to continue to repay her loan. 

Limits of Female Empowerment through Financial Services

Months of research in the Kenyan microfinance industry has lead me to argue that gender inequalities, even though impact the participation of women in microfinance and is an essential topic when addressing the empowerment of women, are rarely addressed by microfinance providers and lenders. Many microfinance programs claim to “empower” their clients by granting access to financial services to support a business and earn income.[3] Researcher and development practitioner Gerd Johnsson-Latham argues that “[p]overty strategies often disregard the fact that women as a group face non-economic barriers in terms of social constructs (laws, norms, attitudes) which limit their access to land, inheritance, education, employment, carriers mobility and personal freedom” (43).[4] Unfortunately as explained above, there are other barriers to “empowerment” that women face on a daily basis that microfinance does not consider.

Another form of female empowerment supported by the international development and donor community is education. One of the Millennium Development Goals aims to promote gender equality and empower women through eliminating gender disparity in all levels of education no later than 2015.[5] Even though access to education is extremely important factor in raising the life chances of females, an education provides no guarantee that women will end up with better off without equal access to the job market. Research has found that even as girls begin to attend school at the same rate as boys, females are still less likely to gain access to a well paying employment or decision making positions that affect policy or resource allocation.[6] [7]  

 

I make the same argument regarding microfinance. Even if women gain access to microfinance services to start and support a business, she has many gender based barriers to overcome until she is “empowered” by access to financial services. Again Johnsson-Latham argues that “remedies,” one of which I would argue is microfinance, “…are designed to lift women closer to the level of men by reducing gaps in terms of education and income and so on” rather than challenge “male privilege” (42).[8]

A Look Ahead

As a poverty alleviating intervention, does microfinance have a role in mitigating the impact that gender inequalities have on their women participants? As gender inequalities can impact the repayment of loans and savings deposits of clients, I argue that microfinance providers should take interest. This question is important to contemplate as the success and sustainability of this poverty alleviating tool is directly impacted by socially constructed gender norms. I will continue the conversation in my next blog post through the discussing how microfinance programs can possibly reduce the negative impacts that gender inequalities have on the participation of women. 

---

[1] Hochschild, Arlie R, and Anne Machung. The Second Shift. New York: Penguin Books, 2003.

[2]  Ellis, Amanda. Gender and Economic Growth in Kenya: Unleashing the Power of Women. Washington, DC: World Bank, 2007.

[3] The mission of Kenyan Women Finance Trust is “to partner with women in their creation of wealth.” The mission of Faulu Kenya is “to listen and empower Kenyans by providing relevant financial solutions.” The mission of Opportunity Kenya is “to empower the economically active poor through financial and related services, which attract and retain a growing client base.” The mission of Jamii Bora is “to assist our members to get out of poverty and build a better life for their families.” [Such information can be found on the websites of each organization.]

[4] Ibid.

[5] United Nations. Millennium Development Goals. “Goal #3: Promote Gender Equality and Empower Women.” <http://www.un.org/millenniumgoals/gender.shtml>.

[6] Ibid.

[7] Johnsson-Latham, Gerd. “Power, Privilege, and Gender as Reflected in Poverty Analysis and Development Goals” in Chant, Sylvia H [editor]. The International Handbook of Gender and Poverty: Concepts, Research, Policy. Cheltenham, UK: Edward Elgar, 2010.

[8] Ibid.

The Expansion of Collateral in Microfinance

-Expansion of Collateral in Microfinance: Definition of chattels and its purpose.

While researching the loan procedures and requirements of the Kenyan microfinance industry, I discovered that the use and definition of collateral has expanded in most Kenyan microcredit programs. Currently, savings, co-guarantee of other borrowers, and chattels are collateral requirements for a Kenyan borrower to secure their microcredit loan. Chattel is defined as tangible, movable property. Chattels can range from a sewing machine, vehicle, machinery, furniture or household items. Some microfinance programs also allow the use of crops and live stock as chattels to secure a loan.

Currently, 27% of Kenyan financial institutions accept chattels as a form of collateral for a loan. In 2010-2011, an estimated 28,000 chattel documents were registered with the Kenyan chattels registry. The microfinance institutions, for profit microfinance providers, non-profit organizations and commercial banks that I have researched in Kenya require every borrowers to pledge chattels as part of their loan collateral.

-Why expand collateral in microfinance?

The justification for the expansion of the collateral requirements of the microfinance industry is to continue to expand its services to low income clientele who do not have access to traditional forms of collateral such as a property title deed. The borrowers of the microfinance industry are unique compared to the rest of the financial sector, thus they require untraditional loan requirements. The majority of loans are characterized as short term, high cost, and high risk that are used to invest in micro, small and medium sized enterprises. Thus, in theory the use of chattels is supposed to reduce the risk of lending since only a small percentage of Kenyans, to be more specific less than 1% of Kenyan women, can secure a loan with a title deed. By using chattels, the microfinance industry can capture a large percentage of Kenyans who are excluded from borrowing based on traditionally collateral security requirements.

-The challenges of chattels mortgage according to lenders.

While attending the Chattels Mortgage Registry Sensitization Workshop hosted by the Department of the Registrar-General, I learned that there are several challenges regarding the use of chattels mortgages to secure a loan. Even though the use of chattels are meant to decrease the risk of lending, the process of registering chattels items and creating a chattel mortgage transfer has its challenges, thus leaving many institutions frustrated with its use.

In fact, a representative from Faulu Kenya, one of the largest deposit taking microfinance institutions in Kenya, stated that due to difficult and time consuming process of chattels registration and creation of a chattels mortgage, the institution halted the use of chattels to secure loans smaller than 20,000 Ksh. According to lenders at the conference, many are upset that the process of chattels registration and transfer is manual making it difficult to conduct searches to determine whether a borrower is using the same chattel to secure loans in more than one institution. Also, as chattels are a form of collateral that is movable, there is the risk that during the period of a loan the chattels may be damaged or never recovered in case of default. For these reasons, lenders still label microcredit loans as a form high risk lending.

-Repossession: The Ignored Component of Chattels Mortgage.

At the conference, reforms were discussed including the need to computerize the chattels registry and increase fees. One possible reform that was ignored is the need for clarification and enforcement of the repossession process of chattels. At the conference, I argued that the importance of enforcement guidelines and regulation is just as important as the registration process. Why discuss the legal requirements to register chattel and create a chattels mortgage without clarifying how such collateral can be repossessed? There needs to be legal reform and clarification of the Chattels Transfer Act regarding enforcement guidance of chattel repossession. 

Over the last few months of research, many microfinance programs reported vague and often illegal repossession practices according to the Chattels Transfer Act. The timely and difficult registration process often leads many institutions to ignore legal requirements set in place for the use of chattels in lending. Even though chattels are often not registered or a chattels mortgage instrument is not created, a process that lenders in the microfinance industry undertake themselves to create legal means of repossession in case of default, lenders often attempt to undertake repossession. I argue that the department of registrar needs to ensure that borrowers are aware of the legal requirements of registration and repossession, specifically their legal rights as borrowers, by clarifying and enforcing the repossession process of chattels.

At the conference, many lenders proposed a similar initiative stating that their borrowers lacked awareness making it difficult to repossess items pledged as collateral. Borrowers often seek police intervention when a lender hires an auctioneer to repossess chattels in times of default. Thus, lenders also called for the registrar office to increase efforts for the sensitization of borrowers in the use of chattels as collateral. I applaud this notion for the purposes of ensuring that clients are able to hold their lenders responsible for following legal repossession tactics.