Interest Rate Sensitivity Among Village Banking Clients in Mexico

Key activities

“Loan officers targeted self-reported female entrepreneurs and promoted the Credito Mujer product through diverse channels, including door-to-door promotion, distribution of fliers in public places, radio, promotional events. As loan officers gained more clients in new areas, they promoted less frequently and relied more on clients to recruit other members.” Loan officers then visited the groups twice to explain loan terms and processes. The women were responsible for selecting “creditworthy” group members. “Each group then elected a treasurer to collects payments from each group member, at each weekly meeting… If a group member did not make her weekly payment, the President (and loan officer) typically solicited and encouraged “solidarity” pooling to cover the payment and keep the group in good standing. All payments were placed in a plastic bag that Compartamos provided, and the Treasurer then deposited the group’s payment at either a nearby bank branch or convenience store.” (Karlan et al., 2013).

Outcomes/results

Cited from J-PAL, 2019:

• “By the third year, areas that offered lower interest rates were bringing in significantly more first-time borrowers and more borrowers with both high and low education relative to regions under the high-rate scenario. Decreasing the interest rate did not generate detectable effects on delinquency (any lateness in repaying loans) or on severe delinquency (more than ninety days late in repaying loans).”
• “Microfinance clients were extremely responsive to changes in the price of loans: outstanding loan balances increased by more than 10% due to the 10% reduction in the interest rate.” 
• “Overall, there was no change in Compartamos' profits due to the lowered interest rate… These findings suggest that MFIs may be able to lower rates to both attract and retain more clients, who in turn borrow greater amounts.” 

Key enabling environment factors for the intervention 

• “Compartamos has partnerships with six banks (and their convenience stores) and two separate convenience stores. The banks include Banamex (Banamex Aquí), Bancomer (Pitico), Banorte (Telecom and Seven Eleven), HSBC, Scotiabank, and Santander. The two separate convenience stores are Oxxo and Chedraui.” (Karlan et al., 2013). These established relationships gave the women access to many places to drop off their loan payments, helping to prevent distance from becoming a barrier to participation.
• Compartamos creates incentives for repayment. “Members of groups with arrears are not eligible for another loan until the arrears are cured; members of groups that remain in good standing qualify for larger subsequent loan amounts and lower interest rates. Compartamos also reports individual repayment history for each borrower to the Mexican Official Credit Bureau.” (Karlan et al., 2013).

Key design elements and principles that led to successful outcomes

• Credito Mujer was promoted through diverse channels to reach a diversity of women.
• The program Incorporated financial literacy elements through in-person visits by loan officers.
• The program featured a women-centered design model; women clients recruit other candidates, screen them, and oversee loan repayments.

Potential for scale/replicability

This program has the potential to be scaled/replicated due to the women-centered design model. After the two trainings conducted by loan officers, the women themselves are responsible for managing their finances. The women also conduct most of the marketing and outreach activities. Overall, the women participants do most of the heavy lifting of the program. The program also did not result in changes in Compartamos’ profits, suggesting that fear of loss of profits may not be a factor inhibiting supply-side actors from replicating or scaling up the program.

Recommendations from the research

The research team recommends several avenues of future research. First, given the positive results of the program for both Compartamos and the women participants, the team is interested in understanding why Compartamos did not lower interest rates earlier. The report also recommends examining “innovations with respect to lending technology, such as mobile devices with customized software for credit officers (that are being implemented by many lenders, including Compartamos).” (Karlan et al., 2013).