By Michelle Mak

This session explored the various methods of underwriting microloans, both overseas and domestically, and initiated discussion for what could potentially be the future of microloan underwriting in the US. The panel was moderated by Caroline Glackin (Shepherd University), and panelists Asim Khawaja (Harvard Kennedy School of Government), Jordan Pollinger (Federal Reserve Bank of New York), and Nelly Rojas-Moreno (Accion Texas-Louisiana) shared about experiences and opportunities they perceived could improve underwriting methodology.

The panelists initially described four basic types of microloan underwriting methodology:

• Credit Scoring Model – relying on individual credit scores as an indication of creditworthiness.
• Peer Lending Model – traditional model of microfinance overseas whereby loans are made to groups of women who mutually guarantee each other’s loans, and only one person may have an outstanding loan at a time; repayment is on a weekly basis when the group meets.
• Traditional Lending Model – underwriting used traditionally in banking, which is based on predicting business’s future cash flows, collateral, or guarantors.
• Behavioral Model – methodology that utilizes personality tests to identify entrepreneurial leaders, who have a high likelihood of business success, and ultimately will have the capacity to repay the microloan.

The panelists recognized that microloan underwriting has developed in the US based largely based upon underwriting methodology overseas. Group lending has not been as popular domestically as internationally, therefore in the US, we rely more heavily on credit scores, while still emphasizing a personal relationship with the borrower, and understanding the business and source of client’s motivation. We also recognized that in the US, we are more so trying to empower entrepreneurs, whereas in developing countries, we are trying to alleviate poverty.

We then delved further into the Behavioral Model. Asim championed the idea of underwriting microloans based on the Behavioral Model, based on research from the Entrepreneurial Finance Lab at Harvard (http://www.hks.harvard.edu/centers/cid/programs/entrepreneurial-finance-lab-research-initiative). This methodology measures entrepreneurial potential through four characteristics: ethics, intelligence, psychological profile, and business skills. The model is currently being tested in Latin America and Africa and thus far has been successful, indicating that entrepreneurial personality characteristics may cross cultural barriers. While the Behavioral Model is practical in theory, the audience and panelists discussed its relevance, considering the different goals that venture capitalists and microfinance institutions have. Venture capitalists generally don’t expect the majority of their investments to be successful, but the ones that are, are wildly successful. On the other hand, microloans generally have a repayment rate well over 95%. However, it is certainly a method to be further tested.

Overall, the session was very insightful and the panelists brought a breadth of experience and research. I think it would have been relevant to include more panelists who were experienced in technical microloan underwriting, in addition to academic research. It was interesting to hear how professionals in microfinance assess risk domestically though, and I look forward to learning more innovative underwriting models as we continue to develop microfinance both overseas and domestically.

Michelle L. Mak currently works in the Education and Nonprofit Banking Group at Wells Fargo Bank in New York City, and recently returned from six months in China where she did microfinance in Jiangsu and established an office in Hong Kong for Opportunity International.