The "Combined Loan Problem": An Unexpected Twist from a Wrong Assumption

I recently discussed a product-environment mismatch in my first venture into housing microfinance. In our second season of operating that home improvement loan (HIL) in rural northern Malawi, we had a fascinating development that was the direct result of the product-environment mismatch and some wrong assumptions made as we developed the product. It was frustrating as a program manager, but at the same time I couldn’t help but to admire the creativity of our clients in addressing their housing needs as experienced in the local context.

In the first season of our HIL program (May to December 2002), the maximum loan amount was 12,000 kwacha (or approximately $200 at the time). This was enough to roof a small, simple house. It was assumed that if clients had a larger houses, they could roof part of the house with one loan and roof the rest of the house with a subsequent loan. Examples of houses that were partially roofed with thatch and partially roofed with corrugated metal sheets had been viewed in various places around the country during our market research. At the close of the season, an evaluation was held and people in the community almost universally stated that the maximum loan size was too small. The majority of respondents recommended that it be raised to 18,000 kwacha. This seemed reasonable and the HIL product was adjusted to have a maximum loan amount of 18,000 for the following season.

With the harvest and the start of the next season in May 2003, community members were pleased that we had listened to them and adopted many of the changes they had recommended. Unfortunately, by that time the economic situation had changed. 18,000 kwacha in May 2003 bought fewer roofing sheets than 12,000 kwacha had purchased in May 2002! We definitely were not keeping up with the pace of change in the economy, so some creative clients decided to take matters into their own hands. They essentially created something like a ROSCA (Rotating Savings and Credit Association) using our home improvement loans.

Let me take a brief moment to explain how a ROSCA works. A ROSCA is an informal finance mechanism that is very common in Africa. In West Africa is called susu, in Congo it is called likelembe, in Tanzania it’s upatu and it is known by many other names across the continent. The most common form of a ROSCA brings together a group people who trust each other and decide to give a fixed amount of money to the group at given intervals over a period of time. They take turns receiving the entire amount until each person has received a payout. This helps the ROSCA members take small earnings and convert them into a larger more useful amount. For some excellent reading on how the poor convert small amounts of income into larger and more useful sums, Stuart Rutherford’s The Poor and Their Money is highly recommended and can easily be located through an internet search and downloaded.

An example of a ROSCA might be a group of 7 people who decide to pay 500 shillings (an East African Currency) each to the group per day over a period of one week. Each day, a different person in the group takes home the total amount of 3,500 shillings (3,000 shillings from friends and their own 500 shillings). The first person in the group to receive the payout received 3,000 shillings credit from the group, which was repaid over the rest of the week. The last person to receive the payout essentially saved 3,000 with the group and got it back on the last day. At the end of a rotation, the group can continue, disband or reform with new members and/or terms.

To continue to digress with a practical example of a ROSCA, one of my very early assignments was in appropriate technology transfer and making roofing tiles. In one “factory” with which I worked, there were six young tile workers who were unmarried and still lived at home. Their salaries were primarily used for frivolous consumption. They realized, however, that the cost of a new bicycle (not just any bicycle, but the coveted Phoenix bicycle) was almost exactly six times their salary. They made a pact and formed a ROSCA. For six months, they all gave their entire salaries to one of the tile workers, who bought a bicycle. At the end of six months, they each had a Phoenix bicycle, improved transport and a certain level of local prestige. They then disbanded their ROSCA and went back to their normal spending patterns.

And now back to the home improvement loan clients in northern Malawi... Because the maximum loan size was too small to roof some of the clients’ houses, extended family members and close friends formed groups of three. (These were informal groups and completely unknown to us at the time that the loans were disbursed.) Each group member applied for a maximum home improvement loan to roof his own house. When the loans were disbursed, however, two of the clients would give their loans to the third client, who would completely roof his house with the three loans. When the loans were paid off, they planned to do the same thing again and roof another house. This was a brilliant client adaptation. Unfortunately, where we thought we would report three houses roofed with home improvement loans, the loans had only roofed one house. We called it: “The combined loan problem.”

A "COMBINED LOAN" HOUSE

The clients didn’t seem to think the combined loan problem was a problem at all. As far as they were concerned, it was none of our business whether they actually roofed the house they had told us they would roof or whether they had decided to help a friend instead, as long as they paid. It was hard not to see their point, although it was contrary to our systems and our objective of each loan resulting in a home improvement on the house of the client. We continued to make product adjustments to avoid the problem in the future, but we realized that we had made a critical wrong assumption in our product design process.

We had assumed that if the maximum loan amount was not enough to roof an entire house, people would roof part of a house. We had seen this in Malawi, but not in that specific area in which we implemented HIL. As we delved deeper, we found that in the local culture “No Ngoni (the predominant local tribe) man can partially roof his house.” Out of the few people who met our construction quality criteria for a loan (see 19th September posting), many did not come forward for the loan because it could not roof their whole house. In their personal assessment of our product’s usefulness for their housing situation, it was better not to roof their house than to partially roof it. “What made me not pay the deposit (to receive a loan) is that I was not yet decided on having my house partly roofed or not. I had to think twice on this,” said one registered client who had not applied for a loan. “I didn’t apply last year because I wanted a complete roof for my house. By the time we were answered that we could get a double loan (meaning by the time he found out others were combining loans), it was already raining and I was focused on other things,” said another person, who also alludes to the impact of seasonality on the calendar of local activities. The unsuitability of a partially roofed house was a common theme that came up in the season two evaluation, as we continued to learn and better adapt our home improvement loan product to the housing realities of the people who would use it.

A lesson learned from the combined loan problem was that market research should be specific for the area in which the product is being launched. At the very least, generalizations and assumptions taken from the broader context should be verified in the local context. Another lesson learned was that using a learning cycle of research – design – implementation – evaluation – redesign – implementation – evaluation, etc. is very helpful when launching a new product or using a new approach. The home improvement loan product changed significantly from the way it came “out of the box” from product development, as we have learned from how it was used (or not used) and how clients and potential clients viewed it. Market research is great and necessary, but further evaluation and research based on actual implementation sometimes tells more.

(Photos and chart used in this posting are by the author)