The Face of Change

Shifting the Collateral Barrier

What does a woman have to do to get some credit in Ethiopia?
In a 2011 study, access to credit was noted as a serious bottleneck for 40%
of the Ethiopian women business owners surveyed 1. The challenge, however,
was not the inability of women to access any credit Ethiopian microfinance
institutions

(MFIs)were

successfully

targeting

women

micro-borrowers

through group lending schemes. The problem was womens inability to

access large enough loan sizes to grow their businesses beyond the micro
level2.
One of the most serious bottlenecks to getting these larger, individual
business loans was collateral. At the time, most MFIs required personal
residences as collateral. But not all women own homes and if they do, the
house may not be properly registered. Alternatively, if their husband holds
title, he may be unwilling to sign the collateral agreement3.
The Womens Entrepreneurship Development Programme (WEDP) was
designed

to

expand

access

to

finance

to

growth-oriented

women

entrepreneurs. One of its greatest challenges and successes has been in

reducing collateral requirements or coming up with non-traditional collateral
options to help women entrepreneurs access larger loans that could catalyze
the growth of their businesses.WEDP has tackled the collateral challenge by
taking three broad approaches:
1. Introducing cash-flow based lending;
1 Triodos Facet. FINAL REPORT: ETHIOPIAN WOMEN ENTREPRENEURSHIP CAPACITY
BUILDING STUDIES. The Netherlands. April 19, 2011: 23.
2 Ibid: 95-96.
3 Ibid.
1The Women's Entrepreneurship Development Programme, DAI

February, 2015

2. Urging participating WEDP MFIs to minimize collateral requirements

and expand the types of collateral they can take; and
3. Introducing psychometric loan appraisal.
Perhaps the method with the most promise and potential is the last on the
list, psychometric testing. Colin Casey, who manages East Africa operations
for EFL Global, a company whose psychometric credit scoring technology is
now being introduced in Ethiopia, explains:
EFL provides an alternative approach to measuring risk for micro,
small and medium enterprises. Weve seen that in Ethiopia and across
the emerging world there is very little information with which lenders
can make credit decisions: few people have verifiable credit histories,
credit bureaus are thin and often unreliable, and information sharing
across institutions is hampered by data quality and other technological
hurdles.

All of this makes it difficult for individuals to demonstrate

their credit-worthiness to lenders, so many are excluded from formal

financial services, and those that are included often face extremely
high collateral requirements.
EFLs credit survey proactively gathers data rather than looking at past
history, enabling lenders to measure an individuals repayment
potential even when other information is unavailable. We use
questions and interactive exercises to measure characteristics like
business skills, intelligence, integrity and autonomy. Our Android
based survey takes about 30 minutes to complete and can be
administered by credit officers online or offline, in branches or in the
field.
We customize our surveys by first adjusting questions to local contexts
and translating into local languages. Then, over time, we observe the
relationship between the way people answer EFL questions and the
way they repay their loans in order to build credit algorithms that are
2The Women's Entrepreneurship Development Programme, DAI

February, 2015

customized to the local context. Our partners around the world have
administered nearly 200,000 EFL surveys across four continents,
enabling highly predictive models that can accurately measure risk in
even the most information-scarce markets.
EFL is now in the pre-pilot stages of implementing their psychometric tool
with one MFI in Ethiopia, ACSI. The partnership between ACSI and EFL was
brokered by the World Banks Gender Innovation Lab. The Gender Innovation
Lab, which runs rigorous impact evaluations on innovative tools for womens
economic empowerment across Africa, explored the possibility of launching a
number of novel lending technologies with the various WEDP MFIs.
Assuming it is successful, it will expand the use of the technology across
ACSIs branch network.The pilot of the psychometric testing tool will be
accompanied by a rigorous impact evaluation designed by the World Bank,
EFL and ACSI which will a) examine the impact of loans disbursed through
psychometric testing on the growth of clients enterprises; and b) measure
the effectiveness and profitability of this tool compared to ACSIs traditional
forms of collateral appraisal.
Over the next three years, an estimated 5,000 borrowers are expected to
receive loans from ACSI based on psychometric loan appraisal. If the
implementation goes well, EFLs tool could be adopted by other financial
institutions in the country, some of which have already shown an interest in
the innovative technology.

3The Women's Entrepreneurship Development Programme, DAI

February, 2015

Collateral Coverage Required by MFIs Reduced from 200% to 125%

250%
200%
150%
100%
50%
0%
Before WEDP
Collateral Required

Today
Loan Requested

EFLs

psychometrics

scoring

technology will be used in tandem with the current cash-flow based lending
analysis currently being used by the WEDP MFIs, reducing collateral
requirements for high potential individual borrowers.
But the cash flow analysis and proposals to expand guarantees to other
types of collateral have already madean impact. Cash-flow based lending
gives MFIs more confidence in a prospective borrowers ability to repay by
enabling them to understand the businesss repayment capacity. More MFIs
are experimenting with using post-dated checks, vehicles, and other forms of
guarantees rather than simply requiring a house as collateral. Theyre also
combining different types of collateral to reach their coverage ratio, an
innovation in Ethiopia. And since the inception of WEDP lending in January,
2014, the collateral coverage required by participating MFIs has been
reduced on average from 200% of the loan to 125%.
The trend in collateral coverage required is moving downward. For example,
the MFI Wasasa has recently made two loans to repeat borrowers with zero
collateral relying completely on the borrowers credit history. Other MFIs
like ACSI and Harbu are frequently only requiring 75% coverage for repeat
borrowers. Since these MFIs are bearing all the risk of loan repayment, this
reduction represents a significant leap of faith.

About WEDP
4The Women's Entrepreneurship Development Programme, DAI

February, 2015

WEDPs technical assistance to MFIs is administered by a DAI

consultancy, funded by DFID. The $42M WEDP credit line for
participating MFIs was financed by the World Bank. Initially, eight
MFIs participated in the program. In 2015, four additional MFIs joined
the WEDP team.

The WEDP average loan size

across all participating MFIs is
236,701 Birr, landing in the
lower bound of the missing
middle

of

targeted

borrowers4.

More

than

half

of

WEDP

borrowers are new to the MFI,

indicating an expansion in MFI
outreach.

For repeat borrowers, there is an average 203% increase in size from

their prior loan.

In the first year of borrowing, WEDP clients report an average 24%

increase in income.

4 In Ethiopia, the missing middle is generally considered to include borrowers

seeking loans between 50,000 1,000,000 Birr.
5The Women's Entrepreneurship Development Programme, DAI

February, 2015