projecteverest

Proposed Experiment

[Proposed Experiment]: SoCon Malawi - Lending to Village Banks - July 2018

by
Henry Baldwin
+1
Submitted by
Henry Baldwin | 9 months ago | in Knowledge Base

Background

Village banks have proven to be a fascination due to their ingenuity in providing their communities access to loans that normally would be totally inaccessible due to a lack of collateral. A detailed summary of how they operate can be found here. In short, village banks can reliably distribute loans to their communities with a very low risk of default. From our interview with one village bank, we discovered that they were not capable of providing a loan to everyone who required one (roughly ⅗ of applications were granted). The treasurer mentioned that they were very interested in investors as they would be able to increase the size and amount of loans issued, but had no luck with finding any.
So what if instead of Project Everest acting as a microfinancer, we instead invest in these village banks? I’ve outlined a potential experiment that could be ran below, with further justification and explanation of actions beneath.

Theoretical Experiment:

Aim
To test whether increasing capital of a village bank increases the capability of the village bank to deliver its services, and generate a return for Project Everest.

Method
We loan a village bank a small amount of capital ($50-100 AUD) to provide a small boost in their capability to deliver loans. This amount has been suggested as it should not be too disruptive for the village banks and carries less risk. The loan will be charged at 10% interest, as the village bank charges 20% so they will still profit from the loan. This loan will be returned to coincide with the end of the bank’s 6 month borrowing period. Although a lengthy borrowing period, we want to cause as little disruption to the village bank as possible. If possible we should try follow this money to see how it is spent.

Ideal results
Full accountability of the loan, and a return on investment at the end of the borrowing period.

Assumptions

  1. That village banks are well trusted by the community.

  2. That village banks are an effective method of distributing loans to small communities

  3. That village banks will properly use the investment in a manner that will be of a benefit to them and generate a return for us

  4. That village banks will be able to consistently return the loan amount to us with interest despite success of businesses they choose to give loans to.

Validating these assumptions

  1. Surveying the community and clients of the banks to ask their opinion, and further research.

  2. From reviewing their ledgers and our understanding of their low default rate, we can most likely assume that they serve their community well and will be an effective mode of delivery.

  3. We can test this by staying in close communication and coordination with the treasurer, and tracking with a small investment at first as a pilot program.

  4. Consultation with the treasurers and active experimentation.

Justification of Program

Effectiveness of village banks
Village banks utilise the unique trust and social pressure systems inherent in these tightly knit communities to distribute loans with a default rate well below the national average (<4% vs ~15%). We also know that the banks in Nancholi maintain roughly 40-50 clients. From our interview with one village bank, we discovered that they were not capable of providing a loan to everyone who required one (roughly ⅗ of applications were granted). We also learnt that the best way for a village bank to grow is through expanding businesses but will often lack the capital to properly invest in one (will need to confirm if this issue is consistent with other banks). The treasurer mentioned that they were very interested in investors as they would be able to increase the scale and amount of loans issued, but had no luck with finding any. Overall though for distributing microloans it appears that village banks serve their communities well.

Accountability
The Energy team’s project to distribute their solar packs on a lease program has shown issues with Project Everest acting as a distributor. It is yet to be seen how successful the program will be once we leave country. As the village bank is in charge of returning the investment and distributing the loans, Project Everest does not carry the individual risks on each business that is given loans out to, and as such can charge a lower interest rate due to the decreased risk. This will in addition make us a more attractive choice as an investor.

Future Actions
We could potentially increase the size of the loan once we’ve formed a judgement on how the village bank handles the increased capital. If the program is successful we may be able to provide larger and larger amounts (assuming a great deal of accountability) that would boost the village bank and generate stronger growth. This program could be scaled up to other village banks and regions for natural growth. Theoretically, Project Everest could maintain a strong relationship with say 5 village bank treasurers, and potentially deliver a real impact to hundreds of people through their connections.

Even further, we could potentially issue a group loan to multiple village banks in a reason. Say for example Nancholi has 5-6 banks. In a similar manner to other group loans where each individual acts as a guarantor, each bank would have to support each other. This could lay the groundwork for much larger scale investment.

Moonshot idea: if village treasurers own smartphones, we could potentially develop an app that would allow them to connect and obtain these loans on a digital platform.

Conclusion
Investing in these village banks could be a very mutually beneficial relationship. The bank will have access to capital they previously were not capable of obtaining, and can either meet demand for their clients or fund larger loans to grow the bank. Project Everest benefits from investing in a socially responsible and sustainable organisation, with potential to grow and develop a unique relationship into the future. We can tap into a potentially safe investment that is currently being denied access to capital. We have a unique value proposition that is currently not being met by competition (we will further verify this assumption in the coming week). I believe this is an experiment that is well worth investigating over the summer.

Please leave your comments and thoughts below. Thanks for taking the time to read through to the end :)

 

edited on 5th September 2018, 23:09 by Justin Hakeem

Samantha Orum 9 months ago

As you said, with such a fascinating infrastructure which effectively uses social pressure and group empowerment to bring the default rate to almost non-existent, it would be amazing for PEV to use this experiment and the investment to gain a thorough understanding of culture and processes of village banks.

In terms of this, I would be really interested to see exactly what outputs you would like to see from the investment, alongside access to the ledgers, for example: With the added investment, are there any priorities given for people who want to use the loans for business or is it first in, first serve? Will they use the investments to increase the maximum loan given to people or will they increase the number of people they give loans to? What are people using the loan for, good debt or bad debt?

This data and information collection could easily be implemented as terms and conditions of the investment, and over summer, it could be as simple as a weekly or fortnightly meeting with the treasure, but, as you have stated above, what are some ways we can still collect this information while we aren't in Malawi?

Finally, for the pilot period, it would be good to consider how much PE involvement would there be in terms of presence during village meetings or education or consultations to improve the bank or business operations etc., how would this affect the integrity of your experiment objectives? Would the variables change with future iterations?

Awesome post Henry, look forward to reading more!

Reply 1

Mallory Dobner 8 months ago

I think an important aspect would be to follow the money and to see where people were spending the loans, and if it was where they said they would spend it. Is there any current form of tracking in the village banks, or is there a system that you think you would be able to implement in order to understand spending habits of loans?

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Wade Tink 8 months ago

I think that this experiment could be worthwhile even without following the specific individual loans. As a potential customer segment the opportunity is larger scale and lower default rates- both great things even without the additional tracking of the individuals.

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Wade Tink 8 months ago

I think this is very viable and a great opportunity as an experiment. Could you lay out some more details around the capital outlay required and the measurement metrics to determine validation of the assumptions.
What would be the success and failure point of this?
Practically, for Dec-Feb period are you proposing to lend to just one village bank and monitor that closely as a concierge type model or would there be the capacity to lend to multiple banks and still achieve the required metrics/learnings?
Maybe a question on capacity for Sam and Ella.

Reply 0

Wade Tink 8 months ago

Status label added: Proposed Experiment

Reply 0

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