How much is too much?

By Julia Kastner, KF10 Mexico

A lot of Kiva blogs have discussed the issue of interest rates and how much interest should be paid on a microfinance loan. But what about the size of the loan itself? It’s actually not that easy for an MFI to decide how much to lend to a client – if they lend too much, they fear the client won’t be able to pay back the loan, but if they lend too little, the client may not be able to achieve their business goals. For CrediComun, my MFI in Mexico, ensuring that their clients are not over-indebted is a major priority – they want to help their clients, not make their lives harder, and so they take loan size very seriously.

While visiting CrediComun clients this week, I met two that I think show how tricky this issue can be…

Eva Salazar Velazquez is a potter. She took out a $5,000 Mexican peso (approx. $400 US) Kiva loan to buy more clay and wood for the kiln. She had originally requested $6,000 pesos but CrediComun only authorized $5,000. I asked her what she would have done with the extra $1,000 and she told me she would have used it to pay for school tuition fees for her three children. CrediComun has a strict policy to only fund business loans – investments in economic activities that demonstrate short-term returns. By lending for education for young children, CrediComun would have been taking a huge risk that Eva would not have the means to pay back the loan over the course of four months and that she would end up over-indebted. I asked Eva if her children were able to go to school, and she said yes, eventually, with the profits of her business thanks to her Kiva loan, she was able to pay her children’s fees herself.

Amada López Zúñiga owns a bakery. She took out a $3,000 peso (approx. $240 US) Kiva loan to buy new mixers to make her bread-making faster and easier – previously she had to mix all the dough by hand. She used some of the profits of her business to start building a new space for her bakery. Currently, she bakes out of a room in her house, so her local customers walk through her front door to buy bread. Her town is located on a relatively steep hill, and her new space will be about 30 feet up the hill. She told me that this new space will greatly improve her sales over the next few months because in the rainy season, which in Mexico starts in May, the hill becomes dangerous to walk down, so many of her customers will not walk down the path to her house. If she has a store-front on the street above her house, however, her clients will buy her products. Right now, she has constructed the majority of the space, but would need a $15,000 peso ($1,200 US) loan to build a roof for the bakery. Normally, CrediComun would not authorize a loan that is five times greater than the previous loan to a client, for fear that they would not pay it back. In this instance, however, the CrediComun manager I spoke with said they might be willing to authorize this loan if Amada could truly demonstrate the gain she would make from the investment and thus her ability to pay back the loan. He said they also might consider this special case because if they do not give her this loan, Amada might decide to take the rest of the money out from a different institution, which is something CrediComun tries to avoid. Often over-indebtedness arises from clients taking out many loans from many different lenders, some of whom charge much higher interest rates.

I hope these two anecdotes show how difficult the question of loan size can be. Kiva can really help make this issue easier for MFIs by sharing the financial risk of larger loans to clients like Amada. With help from lenders like you, clients like Amada, with larger needs but larger risk, can have access to the funds they need. So please continue to loan to CrediComun – you can find a list of their loans here!