‘By now we have travelled approximately 12 kilometres from the local branch of one of the Microfinance Institutions (MFIs) in the area of Kot Addu, Muzzaffargarh. Out of those 12, we were on the main road for about 8 kilometres, a dirt road for 3 kilometres and the last bit was a pathway in middle of a sugarcane field. The area is quiet and sparsely populated. The loan officer guides our car to one of the two houses located at one corner of the field. A guy comes running to greet the loan officer. He is smiling and boasts a look of respect and appreciation for the loan officer. They shake hands and he invites us to his house. The loan officer enquires about his wife, who has taken the loan from this MFI. The guy runs to get her from the fields she is working in. She rushes back and they insist on refreshments. We humbly refuse but they are persistent and request their daughter to make tea.’
This is one of the many instances, I recently experienced while conducting a field survey for an MFI. It’s overwhelming to see the respect and gratitude clients have for their respective area loan officers. It is clearly not out of the fear of rejection of future loans but the indebtedness for help in securing the current loan. These agents on ground are epitome of the multidimensional development work that is culturally complex and offers experience in diverse social structures and spaces in their day to day encounters at both in ‘the office’ and ‘the field’.
Over the last decade or so, Microfinance has made its name as a radical enterprising solution to minimize exclusion of the poor especially women in developing countries. In Pakistan, there were almost 7.1 million active microfinance borrowers in the first quarter of 2019 as reported by Pakistan Microfinance Network. The basic model follows a participatory bottom up approach that offers tailored programs that first offer credit and then other financial services to those at the bottom of the pyramid. The main goal is to support economic activities at a small scale that will at least enhance the socio-economic well-being of the household taking a loan.
In this situation, loan officers play an important role for clients as they help them navigate through multiple issues they face during loan processes. For example, most of these households are based in remote areas, have minimal assets to offer as collateral, insufficient sources of income, have no or minimal education etc., thus, adding difficulty at various stages of loan process. This is where loan officer acts as a messiah for them. Loan officer is responsible for almost all phases of loan procedure. Firstly, they identify clients based on recommendations from existing clients or those who approach the MFI following a word of mouth or a small campaign by the loan officer. Secondly, the loan officer visits the residence of applicant to fill application forms for them. They need to not only enter information but ensure its accuracy verifying information such as means of income and intentional use of loan money, hence requiring multiple visits to some of the clients based in faraway difficult to access areas. They further facilitate clients through the loan application submission to signing and processing of legal documents till collection of money from the bank. Lastly, they are also responsible for monitoring the loans and ensuring timely repayment.
Loan officers help poor clients access a lumpsum amount of money that can be used to invest in an asset that generates regular income. Almost all the clients surveyed expected their income and socio-economic status to improve after the loan. This indicates their positive attitude and willingness to work to ensure productivity from the loan money. Therefore, clients tend to consider their loan officer as the unique representative of the MFI that shares all the insights and guides them to access the loan money, thus, developing a relationship based on loyalty and trust.
However, a loan officer is appointed for a specific area under the local branch only for a year. Whereas this bond of authority and loyalty provides an opportunity for microfinance institutions to leverage for relationship-based lending. By using this technique, MFIs can manage information asymmetry effectively as loan officers have personal relationships with clients and visit their homes often, hence, are well aware of clients’ economic situation and the ability to repay the loan. And this relationship might be negatively affected if loan officers are rotated too quickly as the client’s loyalty is with the loan officer and not the MFI they represent. Therefore, a recommendation for MFIs is to avoid rotation for loan officers as a method to limit fraud. Rather, it is important for MFIs to set up an adequate incentive scheme for loan officers to ensure their loyalty to the institution. Loan officers are doing incredible work and are highly appreciated by the beneficiaries; however, MFIs also need to understand the intensity of their work and formulate strategy to balance the costs and benefits of appointing one loan officer to a specific area over longer period of time.
Thus, one of the major factors that determine financial sustainability and performance of MFI is the performance of its loan officers. Their behaviour with clients plays an important role in client retention as they act as the bridge between clients and MFIs. Research has shown that intensity of relationship between client and loan officer determines client dropout ratio. As these credit agents act as the key link and a sole point of contact between the MFI and the end-client.