Microfinance 101 - a journey through the loan process

By now, you would have heard of microfinance. People access microfinance loans for a variety of reasons to improve their living situations. However, have you ever wondered what’s really involved in accessing a loan, and what this actually looks like for rural, low-income families who need access to a loan?

We recently met with our Cambodian loan partner, Chamroeun Microfinance, and visited some branch offices and local villages to get a sense of the loan process, from finding out about the financial service to final approval.

Step one: visiting the village

Branch offices of microfinance institutions are located throughout Cambodia, with loan officers often having to travel long distances to give locals the opportunity to access microfinance. For example, the catchment area of a Chamroeun branch will on average be around 25kms to ensure services can be provided to communities in sometimes very rural locations. To inform locals of the financial products available, there will usually be a door-to-door or group promotion in the village. If locals are interested, they will contact the loan officer to discuss their personal circumstances. In other cases, someone might hear about the Microfinance Institution (MFI) through word of mouth. An individual may even call and make an appointment or walk into their local branch for further information. 

Step two: personal circumstances

If an individual or group is interested in a microfinance loan, the loan officer will discuss the products that are most appropriate for the individual circumstances being assessed, much like taking a loan from a bank. This will involve determining the eligibility of an individual or group and ensuring they meet the basic criteria and that they understand the terms and conditions of the loan.

Types of loans

Did you know there are many different types of microfinance loans available on the market, depending on a person’s individual circumstances? Similar to the way a car or home loan are different, microfinance allows a person to take out loans specific to agricultural pursuits, businesses and group loans.

For example, an agricultural loan will take into account the varied cash flows that come from this type of work. That is, an agricultural loan will be structured in a way that takes into account that a farmer may only be paid once the harvest is over, instead of every week or every month, and so the loan repayments may be set to quarterly or monthly to suit these specific cash flows.

Other examples of loans that someone may borrow include a quality of life loan, where they might borrow some money to install a water filter or pump in their home for long-term health benefits, or an emergency loan where they may need to immediately access cash to address a crisis, such as a fire or death in the family.

To determine which loan is best, the loan officer asks questions including what the loan will be used for, or what income streams the person or group has to support them comfortably paying back the loan. These kinds of questions help a loan officer to recommend the best product and loan term possible that will have the highest amount of impact, but one that the individual can repay without going into overindebtedness.

Step three: getting approval 

Once the personal circumstances have been assessed and an individual or group has decided they want to borrow money, the loan officer needs to get a higher level of approval before they can approve the loan – that is, loans don’t just get given to everyone. Approving a loan is a big ethical and financial responsibility. Before the loan can be approved, the loan officer and the microfinance institution (MFI) need to be certain that the loan will be beneficial to the recipient; that they will be able to afford their repayments and not have to take out multiple loans to repay the first one, as this just perpetuates the cycle of poverty.

At Chamroeun, once the loan officer is satisfied, they will complete a loan application with the individual that will be reviewed by their business manager, operations manager, and so on depending on the size of the loan. The higher the loan, the higher the level of scrutiny and approval is needed to ensure that the loan is in the best interests of the client.

Step four: approval!

If a potential loan recipient is deemed to be in a situation where it is reasonable and appropriate for them to take out a loan, the loan officer will let them know their loan is approved, and they will go into the branch to collect the total loan amount.

When a loan is not approved, the loan officer will explain the reasons why, and they always have the option to re-apply if their situation changes.

Once an individual or group is approved for their loan, they can start using the money straight away. This often goes towards paying for agricultural ventures, home and building repairs, or starting or expanding a business. They will then repay their loan, which at Chamroeun is most commonly for 15 months. When their loan term is up and they have repaid in full, they may choose to take on another loan or cease engaging with the MFI.

Good Return’s MFI partners share our vision for a world without poverty. Funds generously contributed by the Australian public are sent to our MFI partners as interest-free capital. This helps them extend their services to vulnerable and low-income communities and pilot innovative financial products for these clients. To find out more, you can visit our loan platform.