MicroLoan Foundation (MLF) | GiveWell

# MicroLoan Foundation (MLF)

MicroLoan Foundation (MLF) is a notable organization receiving 1 / 3 possible stars (our third-highest rating).

Note that fewer than 5% of the charities we have considered have received a star. Only organizations that have distinguished themselves in our process receive stars.

Published: March 2010

## Summary

The MicroLoan Foundation (MLF) is a microfinance institution working primarily in Malawi, and currently expanding to other countries in Sub-Saharan Africa.1 Our review consisted of reviewing materials MLF submitted in response to our questions and phone conversations2 and email correspondence with Peter Ryan, MLF's CEO and founder, and Peter Griffiths, Head of Finance and Operations. When we reviewed the MicroLoan Foundation, we sought to answer our questions for evaluating microfinance organizations. MLF has shared with us two studies focused on their social impact: one regarding the standard of living of its clients and one regarding the reasons that some clients drop out of its program. We have not seen information on these key issues from the vast majority of microfinance charities we considered. We do not currently recommend the MicroLoan Foundation, feeling that the Small Enterprise Foundation provides a better opportunity for donors interested in supporting microfinance.

## What does the MicroLoan Foundation do?

The following is a breakdown of the MicroLoan Foundation's expenses in 2008:3
MLF estimates that in Malawi, about 25% of their expenditure is on training [educational] while the remaining 75% is spent on administering loan products.4 MLF offers a variety of loan products in Malawi with terms of 4 to 10 months. Its most popular loan (accounting for 70% of the loan portfolio) is a 4 month loan repaid in installments every two weeks.5

## Key questions about social impact

In evaluating MLF, we asked our key questions for evaluating microlending charities. The sections below cover its answers to our key questions (see the previous link for why we consider these questions important).

#### How frequently do borrowers drop out of the program?

According to MLF's Social Performance Standard report for 2008, its drop out rate was 26% in that year (calculation details in footnote).6 We have not seen drop out rates for other years. For more information on microfinance drop out rates and how they are calculated, see our microfinance glossary.

#### Does MicroLoan Foundation monitor why borrowers drop out?

To its credit, MLF conducted a survey of reasons why a small subset of clients dropped out, surveying 31 clients (summary available in the footnote).7 MLF told us that it plans to initiate a system for monitoring why clients drop out beginning in January 2010.8

#### Does MicroLoan Foundation prevent client over-indebtedness?

MLF stated that it adjusts the size of loans based on the time of year in an attempt to be realistic about what clients are capable of repaying.9 In addition to seasonal adjustments of loan size and a commitment to working in areas not served by other microfinance institutions, MLF stated to us that, before accepting a new client, it asks group members, the village headman, and the prospective client to confirm that he or she is not currently borrowing money from another organization.10

#### Are borrowers protected against harassment by loan officers and group members?

MLF stated to us that upon entering the program, borrowers are told about powers and responsibilities of loan managers, and what the process is for reporting abuse. MLF stated to us that it has an audit process for monitoring this process.11 MLF also told us that past audits found two instances of harassment, which resulted in loan managers being dismissed and policy changes for the organization.12 We have not seen reports from this audit process.

### What interest rates does MicroLoan Foundation charge?

Accounting for MLF's savings requirement of 20% of the loan amount (10% for the first loan),13 MLF's monthly interest rate for its most popular loan type14 is 12.0-12.4% (144-149% APR and 304-326% EIR). Without the effect of the savings requirement, MLF's interest rates are 8.5%-10.1% per month (102-121% APR and 171-226% EIR). Interest rates for MLF's other loan products and full calculations are available in this footnote.15 Comparing these rates to the Reserve Bank of Malawi's Bank Rate (annual rate of 15% as of March 2010),16 there appears to be a strong case that MLF is primarily providing services, not handouts. For more information on microfinance interest rates and how we calculate the cost of a loan to borrowers, see our microfinance glossary.

### What is MicroLoan Foundation's repayment rate?

It appears that a high percentage of MLF's loans are repaid. We calculated a conservative estimate of MLF's "collection rate" for 2008: the percentage of money disbursed during 2008 that was repaid within the first three quarters of 2009. We estimate that this rate was at least 97.5%.17 This lower-bound collection rate corresponds to approximately a 12.6% annual loan loss rate (i.e. percent of portfolio that is lost per year).18 Note that:
• This rate does not treat loans that were repaid late (though within the first three quarters of 2009) differently from loans that were repaid on time.
• This estimate is quite conservative since we estimated the collection rate assuming a loan term of 9 months, but extrapolated it to a yearly rate using the actual average loan term of ~5 months.
• MLF's reported loan loss rate on MixMarket for 2008 is 1.04%.19 Though this rate may not capture the whole picture (some bad debts may not be written off), it suggests further that our estimate is quite conservative and that MLF's actual repayment rate is higher.
Though we have had to do a fair amount of estimating and approximating, our understanding of MLF's "repayment rate" is much clearer than our understanding of the average microfinance institution's "repayment rate." These rates often leave significant room for interpretation and do not lend themselves even to conservative estimates of the "true" repayment rates.20 For more information on collection rates and other forms of microfinance repayment rates, see our microfinance glossary.

### What are MLF's clients' standards of living?

In 2008, clients from randomly selected branches in Malawi21 were asked about their monthly income and other standard of living indicators.22 On average, clients and their households reported earning $51 per household member per month,23 or the equivalent of about$5 per person per day (adjusted for PPP).24 (However, the author notes that the data collection method was problematic.25) 58% of MLF clients had mud floors and 42% had cemented floors.26 54% of clients had grass thatched roofs and 46% had iron sheet roofs.27 In the first half of 2010, MLF conducted a pilot survey of its clients' standard of living using the Grameen Foundation's Progress out of Poverty Index.28 MLF interviewed 162 new clients in two branches.29 Of those interviewed, 55% likely live on less than the equivalent of $1.25 per day and 87% likely live on less than the equivalent of$2.50 per day.30 We note, however, that these results are not necessarily representative of all of MLF's new clients,31 and we look forward to seeing more data as it becomes available. For more information on standard of living surveys of microfinance clients, see our microfinance glossary.

## Room for more funds

MLF stated to us that donations are one bottleneck to extending credit services. MLF also told us that it would like to start a program working with organizations distributing direct cash grants, to help transition these recipients to MLF's loan program.32 MLF stated to us that it would like to raise Â£1.5 million (~$2.3 million) in 2010, half of which would support infrastructure investment and additional loan capital for its operations in Malawi.33 MLF told us that it was able to raise Â£1.1 million in 2009.34 Thus, assuming that MLF is able to raise the same amount for 2010, we estimate that MLF has a funding gap for 2010 of roughly$600,000.

## Remaining questions

• Late loans. What proportion of MLF's loan are repaid on time?
• Drop out rates. What percentage of clients have dropped out in the past?

## Sources

• 1. "The main operation currently supported is in Malawi and called the MicroLoan Foundation (MLF Malawi). In 2008 the MicroCredit Foundation (MCF Zambia) was registered with the Bank of Zambia and will commence making loans in 2009...A smaller operation--the Philippines Self Help Foundation (PSHF)--is also supported by way of grants. We are also in the process of establishing operations in Namibia and Mozambique." MicroLoan Foundation, "Annual Report and Financial Statements (2008)," Pg 6.
• 2. Peter Ryan, phone conversation with GiveWell, December 3, 2009. Peter Ryan, phone conversation with GiveWell, February 23, 2010. Peter Griffiths, phone conversation with GiveWell, February 25, 2010.
• 3. MicroLoan Foundation, "Annual Report and Financial Statements (2008)," Pg 22.
• 4. Peter Ryan, email to GiveWell, December 10, 2009.
• 5. MicroLoan Foundation, "Info on Loans."
Loan typeLength of loanHow often are repayments due?% of MLF Malawi loan portfolio (1/31/10)
Standard loan4 monthsEvery two weeks70.2%
Rain fed farming loans (Tilime)6 -7 monthsEvery two weeks with 4 month grace period16.2%
MV farming7 monthsMonthly with 4 month grace period9.0%
Bridging loan6, 8 or 10 monthsMonthly4.2%
MV other5 - 8 monthsMonthly with 0 - 6 month grace period0.5%
• 6. MicroLoan Foundation, "Social Performance Standards Report (2008)." This rate is calculated as (Number of clients at the beginning of the year + Number of new clients - Number of clients at the end of the year) divided by (Average of number of clients at the beginning and at the end of the year).
• 7. MicroLoan Foundation, "Exit study." None of the 31 clients interviewed for the survey left MLF because they no longer needed credit or because they were successful enough to access credit from more formal sources: "Clients are not leaving because they have ”˜outgrown' MLF. All individuals surveyed cited a negative reason for leaving MLF; such as their own failings or problems with MLF systems, rather than their own success." Pg 1. Instead clients cited the following reasons, in order of how frequently they were mentioned, for leaving the loan program:
1. "a. Failure to generate sufficient profits found to be most significant factor. The majority of ex clients that were surveyed left due to financial problems.
2. b. Two weekly repayment system is widely disliked, and half of participants cited this as a reason for exit.
3. c. Some groups suffer a lack of ”˜unity and love'; disputes, levels of mistrust, and defaulting members, contributed to 30% of individuals leaving
4. d. Illness and death of family members created a burden on resources; financial and time which forced a number of individuals to abandon the loan programme.
5. e. Other factors include; a frustration with small loan size, problems with loan officers, and failings in communication between client and MLF which resulted in the apparently involuntary exclusion of client." Pg 1.
• 8. Peter Ryan, email to GiveWell, December 10, 2009.
• 9. Peter Ryan, phone conversation with GiveWell, December 3, 2009.
• 10. Peter Ryan, phone conversation with GiveWell, February 23, 2010.
• 11. Peter Ryan, phone conversation with GiveWell, December 3, 2009.
• 12. Peter Ryan, email to GiveWell, December 23, 2009.
• 13. MicroLoan Foundation, "Info on Loans." Clients can only withdraw savings between loan cycles. Once the loan is complete, clients can withdraw savings. If a client wants to withdraw funds, the bank (where clients deposited funds) needs to ask MLF for permission. If MLF had a repayment problem with a particular client, MLF will not allow the client to withdraw funds, and MLF can take the funds from the savings account. It normally takes approximately 2-3 weeks for the full process to complete and for clients to receive savings. Peter Griffiths, phone conversation with GiveWell, February 25, 2010.
• 14. MLF's Standard Loan accounts for about 70% of its loan portfolio, and about 80% of its loans (number of loans calculated from average loan size and value of portfolio for each loan type). Data from MLF, "Info on Loans."
• 15. Data from MicroLoan Foundation, "Info on Loans." Annual percentage rate (APR), effective interest rate (EIR) and monthly rate were calculated by GiveWell. Note that the APR is equal to 12 times the monthly interest rate, while the EIR fully incorporates "compounding," whose relevance to MicroLoans is debatable. Calculation available in GiveWell, "MicroLoan Foundation Interest Rate Calculation." For more information on calculating interest rates for microfinance banks, see Langeman 2010.
Loan TypeMonthly interest rateAnnual Percentage Rate (APR)Effective Interest Rate (EIR)Monthly rate (excluding savings requirement effect)APR (excluding savings requirement effect)EIR (excluding savings requirement effect)
First standard loan12.0%144%304%10.1%121%226%
Later standard loans12.4%149%326%8.5%102%171%
Rain fed farming loans7.2%86%134%5.6%67%95%
Bridging (6 month)9.3%112%193%6.5%78%113%
Bridging (8 month)9.5%114%197%6.6%79%116%
Bridging (10 month)9.4%113%195%6.7%80%116%
MV Farming6.3%75%108%4.9%59%77%
MV Irrigation (Winter Cropping)6.3%75%108%4.9%59%77%
MV Irrigation (Rain fed Rice)4.9%59%79%3.9%47%59%
MV Honey Production7.8%94%148%6.0%72%101%
MV Solar Aid9.2%110%187%6.4%77%111%
MV Knitting & Sewing Group8.9%107%180%6.7%80%117%
MV Knitting Machine Individual Loan6.3%75%107%4.5%54%69%
MV Sewing Machine Individual Loan5.6%67%92%4.1%49%62%
• 16. Reserve Bank of Malawi, "Interest Rates."
• 17. In 2008, MLF disbursed a total of MWK 331,080,000 in principal. To be conservative, we assume a three quarters of a year loan term (95.4% of loans have a term of 7 months or less and all loans have a term of 10 months or less). Between January 2008 and September 2009 (the end of the period plus the length of one loan term), there was MWK 1,268,470 in write-offs. In September 2009, there was MWK 7,116,085 in arrears (i.e. all loans that were neither repaid nor written off as of that date). Under the assumption that all debt disbursed in 2008 was either repaid, written off or entered into arrears by September 2009, Lower bound "collection rate" = (331,080,000 – 1,268,470 – 7,116,085)/ 331,080,000 = 97.5% Loan disbursement data is from MicroLoan Foundation Malawi, "Audited Financial Statements (2008)," Pg 14. Write-off and arrears data and loan term data is from MicroLoan Foundation "Info on Loans."
• 18. We used the estimation method given by Rosenberg 1999, Pg 20: Annual loss rate (ALR) = [(1 - collection rate) / (loan term)] * 2 MLF's average loan term is 0.397 years. MicroLoan Foundation, "Info on Loans."
• 19. Mix Market, "MicroLoan Foundation Malawi: Data, Indicators."
• 20. See discussions on our blog:
• 21. "For the MLF clients, a two stage sampling procedure was followed: first, clubs were randomly selected and this yielded 14 clubs. Second, all the members within the selected clubs were interviewed." Kajumi, Pradhan, and Mambo 2008, Pg 12. "A total of 810 respondents were interviewed, representing a 99.8% total response rate." Kajumi, Pradhan, and Mambo 2008, Pg 17.
• 22. "The survey asked respondents to recall income earnings on cash incomes earned by the household from various sources. It is to be noted however, that the measurement of household income for the purposes of gauging household welfare is problematic. In this survey, the estimation was based on a two step approach that sought to (a) capture the total annual household income from all sources based on predetermined income sources, and (b) estimate the contribution of each of the sources to household income. In come contribution from each source was recorded. A weighted average was calculated to estimate the mean household income per month." Kajumi, Pradhan, and Mambo 2008, Pg 35.
• 23. "Average monthly household incomes among MLF clients was estimated to be MK 38,908.00 (USD278.00) or USD51.00 per capita per month." Kajumi, Pradhan, and Mambo 2008, Pg 37.
• 24. Malawi has price level index (i.e. the ratio of PPP (US$=1) to official exchange rate (US$=1) multiplied by 100) of 33, according to the World Bank 2005, Pg 23. $51 per person per month divided by 31 days per month equals$1.65 per person per day. $1.65 divided by 0.33 to adjust for the differences in price levels between Malawi and the U.S. is$4.99.
• 25. "The survey asked respondents to recall income earnings on cash incomes earned by the household from various sources. It is to be noted however, that the measurement of household income for the purposes of gauging household welfare is problematic. In this survey, the estimation was based on a two step approach that sought to (a) capture the total annual household income from all sources based on predetermined income sources, and (b) estimate the contribution of each of the sources to household income." Kajumi, Pradhan, and Mambo 2008, Pg 35.
• 26. "In the MLF and non-MLF sub-set, 42% and 36% of households had houses with cement floors, respectively. Consequently, the balance of households in this sub-set had mud flooring at 58% for MLF clients and 64% for the non- clients." Kajumi, Pradhan, and Mambo 2008, Pg 21.
• 27. "The trend in MLF sites was the same, with more MLF client households having houses with corrugated iron sheet roofs than non-MLF clients at 46% and 39%, respectively. Those with grass thatched roofs among MLF clients accounted for 54%, while among non-MLF clients 61% of houses had grass thatched roofs." Kajumi, Pradhan, and Mambo 2008, Pgs 21-22.
• 28. "The baseline data was collected using the Grameen Foundation's Progress out of Poverty Index (PPI), plus an additional indicator for donor reporting (food security) and an additional indicator defined by management in the March SPM meeting (housing quality)." Hawkins 2010, Pg 1. See also, Grameen Foundation, "A Simple Poverty Scorecard for MicroLoan Foundation."
• 29. "204 clients have been interviewed. Of these 162 are new clients and 42 are exiting clients; 70 were interviewed in the home and 134 in groups." Hawkins 2010, Pg 2.
• 30. Hawkins 2010, Pg 2.
• 31. "The PPI/additional indicators data was collected from all new clients in Mchinji and a sample of new clients in Kasungu (10% of new clients per month)." Hawkins 2010, Pg 1.
• 32. Peter Ryan, phone conversation with GiveWell, December 3, 2009.
• 33. Peter Ryan, phone conversation with GiveWell, February 23, 2010.
• 34. Peter Ryan, phone conversation with GiveWell, February 23, 2010.