Reducing arrears is crucial if MFIs are to achieve selfsufficiency. MFI staff must understand the causes of arrears--whether from clients' testing the MFI's determination to collect, crises in clients' lives, loans that are too large, or loans given on the basis of favoritism. Analytical tools for assessing and preventing arrears include key measures for analyzing arrears (e.g., portfolio quality ratios and performance ratios by credit officer) and financial ratio tests for determining appropriate loan size. The key to reducing arrears is to follow up late loans quickly, form strong solidarity groups, update and enforce credit policies, focus credit officers' services in a specific geographic scope, not lend to start-up businesses, and provide financial incentives for credit officers. In critical arrears situations, MFIs should suspend lending to new clients until portfolio quality improves, as well as ascertain clients' ability and willingness to repay in order to design appropriate strategies to pursue.
Dan Norell is Team Leader of the Development Resources Team for the U.S. office of World Vision. In the microfinance sector, he provides technical assistance and training to MFIs, provides input on the development of microfinance guidelines and standards, represents World Vision in professional associations, and assists in fundraising with public and private donors.
Journal of Microfinance
Issue and Volume
BYU ScholarsArchive Citation
Norell, Norell, Dan
"How To Reduce Arrears In Microfinance Institutions,"
Journal of Microfinance / ESR Review: Vol. 3
, Article 8.
Available at: http://scholarsarchive.byu.edu/esr/vol3/iss1/8