Content written by Grace Njoroge, Project Manager, Mastercard Foundation Fund for Rural Prosperity and Harleen Thati, Monitoring & Evaluation Manager, Mastercard Foundation Fund for Rural Prosperity.
Twenty kilometres from Kitale town in Kenya, lies Ndalala, a small village set within a picturesque rolling country side. Facing Mt. Elgon and Cherang’any hills to his back, Hosea Kiplagat watches his new-born calves playing.
The 40-year-old keeps dairy cows and grows a variety of crops on his farm in the village. Not so long ago his farming, just like that of his neighbours, was only focused on producing enough food for his family. Sometimes he had a little extra to sell off at the local market.
Hosea describes how back in 2005, he got to learn from a friend about a loan from Juhudi Kilimo that changed his fortunes. Hosea visited a Juhudi Kilimo office in Kitale to find out more. A loan product meant for dairy farming interested him, and he applied and received a starter loan of Ksh. 20,000. With it, Hosea purchased his first dairy cow. Within five years, Hosea had twenty high yield dairy cows in his homestead and a highly promising farm enterprise. His increased income gave him the confidence to venture into tomato and maize farming. “Mine has been a real streak of luck” Hosea says. He went on to get bumper crops of tomato and maize and soon bought himself a 14-acre piece of land. Hosea has gone on to win a prestigious CITI Microfinance award for agricultural entrepreneurs in 2015.
Hosea’s example serves as just one to show how access to basic financial services can be a key driver of improved standards of living for individuals and their families, unlocking great potential.
Juhudi Kilimo and Entrepreneurial Finance Lab
Juhudi Kilimo Company is a Kenyan microfinance organisation with a specific mission: to provide working capital and agricultural asset loans for specific agricultural assets that offer immediate and sustainable income for farmers. This is an improvement to the traditional microfinance model, which primarily provide loans for working capital to informal businesses. To date, Juhudi Kilimo serves farmers in 19 counties through 28 branches. It currently has over 35,000 active smallholder farmers and micro-entrepreneurs on its loan book, of which an impressive 57% are women. A rough calculation of the families of these loan-holders translates to approximately 160,000 rural people benefitting either directly or indirectly from Juhudi Kilimo loans, of which Hosea and his family are an example.
The Entrepreneurial Finance Lab (EFL) pioneered psychometric credit scoring through research at the Harvard Center for International Development in 2006. EFL’s psychometric credit survey actively gathers data rather than looking at retrospective financial information, enabling lenders to measure an individual’s repayment potential, even when traditional credit information is unavailable or insufficient. The EFL survey uses questions and interactive exercises to measure characteristics like business skills, integrity and autonomy, and can be administered anywhere, online or offline. Today, EFL works with financial institutions around the world to enable lenders, such as Juhudi Kilimo to safely approve more loans. Currently, over 35 lenders across 15 countries use EFL to grow their lending portfolios, representing a loan book of approximately USD 1.5 billion.
Juhudi Kilimo adopts alternative credit scoring for loan appraisals
Juhudi Kilimo originally began working with EFL in 2015 to develop a psychometric credit scoring model that could be used as a standalone tool to gauge a loan applicant’s suitability for receiving an individual loan in rural Kenya. The original test took over an hour to conduct on a tablet, with a Juhudi Kilimo loan officer taking potential customers through a detailed questionnaire on their habits, behaviours and world-views. Juhudi Kilimo faced some challenges with this model: First, it was time consuming for loan officers to guide the clients through the test in terms of both the time taken to complete the test and the distances to reach rural clients. This significantly increased the operational cost of running the project, which was proving unsustainable in the long run. Secondly, there was an element of bias that came about when the loan officers interpreted the questions for the test takers.
In addition, the slow rate of filling in the tests slowed down the development of Juhudi Kilimo’s customized model. The EFL model is tailored to particular contexts and clients, and for the model to be calibrated for Juhudi, including taking into account the organization’s risk appetite, numerous tests had to be taken. In 2007, the company adjusted the model and started offering the psychometric tests to individuals within a group setting. Once a good number of tests were completed, results were triangulated with the findings from other types of customer assessments and with the existing repayment history of the customers.
After testing out the solution, Juhudi Kilimo and EFL modified the test to be self-administered and completed on mobile phone - including over a simple feature phone rather than a tablet. The self-administered test was scaled down to fewer questions, which potential borrowers could complete in a few minutes. Initially, Juhudi Kilimo found psychometric credit scoring to be most useful to use as part of the company’s credit evaluation process to gauge suitability for group loans. After the initial test and refine phase of the project, Juhudi Kilimo is testing whether the tool can be used as stand-alone to offer individual loans. This re-iteration is now in a pilot phase.
As the test is refined and calibrated, its results will become more reliable on a standalone basis, and Juhudi Kilimo will move towards its ultimate ambition of extending individual loans to new customers based on a simple, cost effective and reliable ‘know your customer’ tool. Then, as smallholder farmers like Hosea continue to build up credit profiles, financial providers will have the basis of providing even better financial access to help improve lives.
At the heart of this project was approximately US$300,000 support from the Mastercard Foundation Fund for Rural Prosperity. The support enabled Juhudi Kilimo pay for various project costs, including the annual EFL licence, and to begin to use this tool to bring it ever closer to its goal of a broader, wider financial services market for all – including the last mile of potential rural consumers who have limited access to formal financial services.