Communal banks? Why not just an individual loan?

This is the question I asked myself as I arrived in May at Fondo Esperanza (FE). After spending 3 months working with Fundación Mario Santo Domingo (FMSD) in Barranquilla, Colombia as part of KF14, I saw first hand how successful individual loans could be in helping people start and grow their own businesses. FMSD had used group lending in the past (and still has a small number of group loans), but found individual loans worked better for their clientele. Fast forward to my arrival at FE in Santiago, Chile: FE dropped individual loans in favor of communal banks about 9 years ago and is just considering individual loans again. The difference in the methodology intrigued me, so I had to do some research and find out more.

To begin, a communal bank at FE is a group of 18-25 clients who meet on a regular basis (generally once a week, sometimes bi-weekly once more established) and guarantee each other’s loans. If one member of the communal bank cannot pay the others must make the payment for them. The communal bank members meet in locations close to their homes, often community centers, to repay their loans, receive training, and develop their network. A community banking loan officer from FE helps guide the meetings and provide training while the groups chose their own members, elect officers, and manage their loan decisions. Loans start as low as 55,000 CHP (about $117) for a term of 14 weeks and go up to 400,000 CHP (about $850) and a 6-month limit for each bank member.

FE began providing microfinance services in 1996 and offered individual loans until 2001. There were no guarantees with the loans, which ultimately lead to a low repayment rate and a low rate of return for FE. In 2002 they began to look at other options; they first tried group loans with 8 members, but continuing to look for better methodologies to serve their clientele. FE organized trips toPeruandBoliviato witness how microfinance was being administered in those countries. From these trips FE concluded that the communal banking model with larger groups would lead to easier administration and community work as they adapted it to work inChile. The visits also offered FE insight on how to work with vulnerable sectors of the population and that the key to a proper methodology is in the product design. Armed with the new knowledge and continued input from other MFIs, FE began to use communal banks as their lending tool in 2004.

For FE, the result has been a dramatic improvement in the repayment rate, which now stands at 99% and never greater than 60% with individual loans. The large group size has also eased some of the cost of administration and allowed FE to introduce theirEntrepreneurshipSchoolas part of the lending process. TheEntrepreneurshipSchoolfocuses on personal, business, family and group development and has included over 50,000 hours of workshops for clients since it’s inception in 2008. The repayment rates and social indicators point to a high level of success with communal banks for FE and their clients, which is composed of some of the most vulnerable and poorest sectors of the Chilean population.

Later this year FE plans to start offering individual loans again, beginning with clients who have “graduated” from the communal bank and are ready to take on individual credit. If successful after 1 to 2 years they will consider offered individual loans to other entrepreneurs outside of communal banking graduates as well. FE is also exploring the ability to offer micro-insurance, as well as retirement savings products. Despite these new offerings, it does not mean that the communal banking product is going anywhere; it serves as a way for entrepreneurs to access their first loans from FE, while at the same time keeping the level of risk low and the repayment rate high. Different methodologies work in microfinance, sometimes even within the same organization, and communal banks are just one of the ways to successfully give an entrepreneur the loan they need to grow their business.

John Gwillim is part of KF15, serving with Fondo Esperanza in Santiago, Chile. He also worked with Fundación Mario Santo Domingo as part of KF14 in Barranquilla, Colombia.

Interested in making a loan to a Chilean entreprenuer today? View all loans currently fundraising for FE here. Also please visit the FE Field Partner page, or join the Fondo Esperanza and/or Chile lending teams.