Digital loan repayment: How costly journeys become obsolete
As microfinance institutions continue to expand their activities in Haiti they are confronted by an important obstacle: distance. MFIs have become a key cog in economic empowerment programs; there is an increasing number of individuals receiving loans in both urban and rural settings. Unfortunately, the cost of opening and running additional branches prohibits MFIs from adequately covering the national territory. Loan recipients living in remote areas find themselves allocating significant time and money in order to travel to and from the nearest MFI branch.
$5 in travel costs to repay a $25 loan
Considerable travel costs create an additional obstacle to loan repayment. It is not uncommon to see recipients spending the equivalent of $5 on transportation in order to repay an installment ranging from $25 to $40. Distance increases the cost of repayment by up to 20%. This unnecessary cost triggers a vicious cycle: When repayment rates go down, MFIs charge higher rates & impose late fees, which further increases the cost of loan repayment.
An innovative solution
Entrepreneurs du Monde’s Microfinance branch, PALMIS Mikwofinans Sosyal, identified Mobile Money as a potential solution. In order to integrate Mobile Money into its loan cycle, PALMIS reached out to LajanCash, the local TagPay licensee. An initial project was set up in the region of Cabaret, Arcahaie and Montrouis, about two hours northwest of Port-au-Prince. A second integration is being launched in the area surrounding Hinche, in the Centre region.
Benefits of digital transactions for the loan recipient
Loan recipients – “partners” in the organization’s vocabulary – are the primary beneficiaries of TagPay’s integration. Through Mobile Money and LajanCash’s targeted agent network, the distances that need to be covered to repay installments have been dramatically reduced. Minimizing travel time and hidden costs has impacted the timeliness of loan repayment and decreased the number of late fees paid by partners.
Benefits of digital transactions for the MFI
Mobile Money increases repayment rates and allows MFIs to better serve their partners. TagPay’s back end also automates many of the previously time-consuming administrative and accounting tasks that are inherent to complex loan cycles. Mobile Money integration has proven to be a powerful tool helping MFIs lower their costs, increase sustainability and provide better services to their partners.
How does it work?
The MFI creates a company account on the TagPay platform. Once a deposit is made to this account, the MFI can instantly credit its recipients’ mobile-wallets. Recipients receive an SMS notification that X amount has been transferred to their account and can withdraw funds immediately from the nearest authorized agent. When it is time for a repayment installment, recipients return to the nearest authorized agent and use the bill payment functionality to transfer money back to the MFI. TagPay’s platform is well suited for developing countries because the platform works on any phone, and is tailored to meet the banking needs of those who do not have access to traditional banking services.
3 Keys for a successful integration
- In-depth and hands on Mobile Money education for loan recipients should be carried out directly by the MFI rather than the Mobile Money provider.
- Focus on Mobile Money’s role in the loan repayment cycle. Explaining other functionalities can lead to oversaturation and confusion.
- Identify the areas where loan recipients live to optimize the distances between the recipient and the Mobile Money agent.