What are good strategies for making loans?

[Guest]

.

[azw]

Assuming you have a set amount of money to work with, does it make more sense to loan a little money to many borrowers? Or would it be better to loan one borrower a lot of money?

There may be a psychological effect which would encourage responsibility and repayment if the money was owed to many people.

On the flip side, it would save me time to make just a few loans.

Are there other concerns? What is your strategy?

[Paula-from-NZ]

I prefer to loan in $25 amounts to different people in different countries - spreading my risk and in theory more likely to get a better return rate.  I think I would become disheartened in the unlikely event that someone defaulted and I lost a lot of money.  I figure I can afford to loose $25, $250 is a different story.

I'm interested to hear other's comments.  I also like the feel of community that seeing the other lenders gives me when I look at who I have loaned to.

Paula
NZ

[smallpotatoes]

I have to agree with Paula - many smaller loans spread the risk.  Although the site-wide risk is relatively small, there is still some chance that a borrower could default, an MFI could go belly-up, or a country/region could experience a natural disaster or civil war.

We have an affinity to the 'Americas' with our lending, but are thinking that we need to keep our country specific risk down to no more than 10% of our portfolio.  We are currently in violation of our new rule, but will be correcting this over time.

"Spud"

[cpbailey]

I agree with Spud (Small Potatoes) that limiting the current portfolio to a percent is a sound lending practice.  I think 10% to a country is reasonable, but it might wise to add a few other measure in there.  For example, consider how much risk you are willing to take, and use the star system to ensure that you are comfortable with the number of 1 or 2 stars.  If you have close to 10% in a country, maybe it should have more than one partner included.

Most of the loans at risk right now belong to very few partners, but it is wide scale non-borrower issues.  For example, Kenya had the riots.  The loans that stopped paying after the riots are not reflecting the borrowers' willingness to repay.  It doesn't reflect the partners sound business practices or moral fiber.  It is a political disaster that drug everyone down.  Natural disasters such as earthquakes (Peru), tsunamis (Bangladesh) and flood or drought can affect a lot of loans.  I suppose a sudden exchange rate change could make it difficult for the partner to repay dollars (Ecuador used the American dollar, so it wouldn't be affected).

Besides it is fun collecting pictures from different lenders from around the world!

Colette

[Canadian Here]

I agree with Spud (Small Potatoes) that limiting the current portfolio to a percent is a sound lending practice.  I think 10% to a country is reasonable, but it might wise to add a few other measure in there.  For example, consider how much risk you are willing to take, and use the star system to ensure that you are comfortable with the number of 1 or 2 stars.  If you have close to 10% in a country, maybe it should have more than one partner included.

Most of the loans at risk right now belong to very few partners, but it is wide scale non-borrower issues.  For example, Kenya had the riots.  The loans that stopped paying after the riots are not reflecting the borrowers' willingness to repay.  It doesn't reflect the partners sound business practices or moral fiber.  It is a political disaster that drug everyone down.  Natural disasters such as earthquakes (Peru), tsunamis (Bangladesh) and flood or drought can affect a lot of loans.  I suppose a sudden exchange rate change could make it difficult for the partner to repay dollars (Ecuador used the American dollar, so it wouldn't be affected).

Besides it is fun collecting pictures from different lenders from around the world!

Colette

Colette:

Over 11% of my portfolio is made up of loans to Tajikistan. I've got several agriicultural loans, loans to a few fruit sellers, clothing retailers (both new and used), a jeweller and a pharmacist. I try to diversify by sector, as well as by country.

Lorna


Lorna

[cpbailey]

Lorna,

Thank you for helping the folks of Tajikistan out.  In the past the loans have filled rather slower, but the more we understand the particular hardships they face...well, the faster the loans are filled.

Yeah, it seems that I natural grab different sectors.  Food seems to be an easy draw though.  I like to eat!     A good picture really draws me in, too.

Colette

[smallpotatoes]

Colette makes a great point - diversify your MFIs in a country, too.  This hasn't been a problem lately, but it awhile ago it appeared that "accounting issues" were a country specific problem (at least as it relates to our portfoilio) with 2 of 4 having their ties with Kiva cut (and leaving lenders a bit in the dark on how this will be resolved).

Also, the 10% is just something that works for us (for now  ) and may not be right for everyone.  We want to be able to re-loan as much as possible, so portfolio risk management is important to us.  Also, for lenders with larger portfolios, 10% would represent a large amount of cash and a smaller percentage might make more sense.  Other borrowers like to lend to a specific country or region; the 10% rule is probably not reasonable in this case.

Lorna - we're close to 10% in Tajikistan and will probably not be adding many more right now  . If we do go over, it won't be by much.

[azw]

Thanks for all of the great responses. That gives me a better idea of how to get going.

When I was reading through the loan requests, it occurred to me that there really isn't much information there.

I can see how it'd be important to consider: whether the borrower has a history of being responsible, whether the project sounds doable, the stability of the Field Partner Institution. But to some degree isn't it a crap shot? (Although the odds are much, much better than it would be with dice!)

[cpbailey]

Azw,

Very few of the delinquencies are scattered in the partners.  Most are wide scale issues with a handful of partners.  Some are old problems that go back to when Kiva had less clout to get in with more stable partners.  Lately, it is through no one's fault with the Kenya unrest.  The partners in this category had high to 100% payments up until the end of December.  This was truly tragic as they lost so much.  I won't begrudge these folks a portion of $25 when homes, businesses and lives were lost!  Go to the partner page, sort on delinquencies and you will see that almost all have 100% repayment.  There are a few under 5%, and the wide scale issues are a handful more.

Use the star system to minimalize risk, if that is a concern.  Then choose regions that are politically stable.  Then choose businesses that you enjoy supporting within this framework.

It seems that Kiva has upped the standards for the partners, and that should help.

I have done far better than in Vegas.  I suspect that folks investing in US mortgage securities will fare far worse. 

Colette

[azw]

Thanks, again! It looks like most of these loans will be fine, so it's largely a matter of deciding what kinds of ventures you want to support. Since we're not in this to make a profit, any attempt at risk reduction is simply a way to keep your money in circulation longer. That's refreshing!

[Canadian Here]

Assuming you have a set amount of money to work with, does it make more sense to loan a little money to many borrowers? Or would it be better to loan one borrower a lot of money?

There may be a psychological effect which would encourage responsibility and repayment if the money was owed to many people.

On the flip side, it would save me time to make just a few loans.

Are there other concerns? What is your strategy?

Does anyone know if the borrower is made aware of the number of KIVA lenders that financed their loan? I was curious about this earlier and forgot to ask!
Thanks.
Lorna

[Dottie b]

Does anyone know if the borrower is made aware of the number of KIVA lenders that financed their loan? I was curious about this earlier and forgot to ask!
Thanks.
Lorna

Apparently at least some get to see the page with all the lenders' pictures, because we've been told some have expressed consternation about us using our pets' photos.

Dottie B

[Canadian Here]

Dottie:
The cat pictured in my photo isn't even one of mine. It's a Microsoft non-copyrighted photo!
I got a fancy camera for a gift a few months ago and I haven't learned how to use it yet so used this photo which looks a little like my "Diva". I thought it was better to use something than leave a blank.
Lorna

[cpbailey]

The animal controversy is that in some cultures it is taken that a dog or cat is their business partner.  I gather if a person is shown with his pet, then it is not offensive to them. 

Me?  I like animals, but am too lazy to figure out how to get a picture with or without pets.

Colette

[mejane]

Dear azw,
On the flip side of all this (for me) is to lend where the need is greatest.  Not that I want to lose all that I loan but those in unstable areas sometimes are those in greatest need.  I especially like the philosophy of GHAPE in Africa.  Also, I have not yet heard about the young man I lent to in Kenya.  Even though there was rioting and loss of businesses, I would lend there again in a heartbeat.  Jane