Replacing Collateral with Relationships
By: Santiago Sueiro, co-Chair of La Ceiba Microfinance Institution
Seven months ago I was appointed Program Director of Honduras Operations for La Ceiba. I am living in El Progreso as the first full-time employee in La Ceiba’s history. Yet, for a long time after accepting the job, I had no idea what Program Director was supposed to do. I wasn’t sure what my role was within the organization and I worried that my presence would cause an imbalance. The experiences I had as a student could not have been the same if there were a full-time Program Director in Honduras.
While I wrestled with this tension, I did the only thing I was sure I was supposed to be doing: I visited our clients one by one. We made small talk until the question occurred to me, “what do you think of La Ceiba?”
The answers to this question led me to believe that our service and product could improve immensely. The more questions I asked, the more involved and active clients seemed to get. I asked further questions.
- What would clients like La Ceiba to improve upon?
- What do they think of our requirements, our interest rates, and our policies?
Something unexpected happened during this time. Since the 20th of August:
- La Ceiba’s Portfolio at Risk fell from 33%, to 8%.
- Our gross loan portfolio went from 50,000 lempiras ($2,500) to 69,277 lempiras ($3,464).
- We added 24 clients to our program including our first male client.
- The disbursed principle over the last three months is 104,300 lempiras ($5,215) compared to 144,000 lempiras ($7,200) disbursed over the entire 2012 fiscal year.
I wonder whether we stumbled upon a powerful idea: did we replace collateral with a relationship? We’ve mitigated our risk despite rejecting collateral requirements, high interest rates, and the plethora of aggressive practices that are justified by our industry. Instead, we built trust through repeated interactions, constant and open communications, clear and explicit terms, and by adopting the attitude that the client can fulfill their obligations without an outsider telling them how. Clients understand our product as a mutual agreement: we won’t pressure you to pay, we’ll charge a fair price, and we won’t engage in aggressive practices. In exchange, the client makes herself responsible for her loan in the way she knows how. The only way we can make this work is if the client trusts us not to take advantage of her and we trust that she will do whatever is in her power to pay her loan.
In the last few weeks, La Ceiba students have met with Ana and I to discuss and develop policy. Together we made adjustments and reached breakthroughs. The meetings served to continue the process of questioning our policies and ourselves, but added a new perspective to the debate. It’s a further opportunity to develop the best product possible where it injects local knowledge and the clients voice into the process. And yet, it is a trade off.
Looking forward we encounter several questions.
- Are we working towards financial sustainability?
- Should we pursue legal recognition in Honduras?
- Can relationships replace collateral?
- What balance can we strike between a student-centered and a client-centered definition?
As we work towards perfecting our operations and roles, our mission and our focus, I am certain that we will do so together as a tribe, and, as we’ve always done, we wont fail to question our every step of the way.