An Experiment in Partnership-Based Microfinance: 1998-2002
This document describes the seven-year learning process that resulted in Fundusz Mikro’s (FM) innovative support system for entrepreneurs. It describes how FM has developed its products based on a growing understanding of Polish entrepreneurs. The fact that FM was operating in Poland in the post-soviet era provided unique challenges that needed to be overcome. In the end FM decided to move away from the typical microfinance standard loan model and move towards an approach based more on trust and mutual assistance, which it calls partnership finance.
The partnership finance loan is repaid in monthly installments, like a standard loan. The difference lies in the way the borrowed capital is charged. The new product is unique in that the borrower participates in setting the loan terms and profit-sharing with the lender. One goal of the product is to teach borrowers to evaluate potential profits in a difficult market rather than focusing on the loan cost. Borrowers estimate the profit they will earn from the loan, then they determine the amount they will repay to us.
The first part of the finance charge is pre-determined and is deducted from the loan on disbursement (the charge is equivalent to what the loan funds would earn in a bank savings account). Before specifying the second part of the charge, the borrower provides estimates of the expected financial returns from the loan and the assumptions used. If these are realistic and the risks acceptable, then the loan decision is made before the second part of the finance charge is determined.
The borrower himself specifies how much of his prospective return will be paid as the second part of the finance charge. In this way he treats the lender like a partner. The second part of the finance charge is repaid in installments together with the principal. If, after repayment of the loan principal, the borrower finds that he did not obtain the anticipated return, the second part of the charge will be refunded to him in its entirety.
The document is broken down into five chapters as follows:
- A Brief Introduction to Fundusz Mikro
- The Need to Bridge the Gap Between Old Attitudes and a New Business Culture
- Changing Fundusz Mikro’s Microfinance Product: From “Hard Lending” to Equity Investment
- The Assessment Process
- Partnership Process
In conclusion the document finds these ingredients as essential in building the new business culture in Poland:
- An entrepreneur’s business knowledge—the ability to assess the effectiveness of an investment
- A sense of enterprise—the skill to foresee changes and adapt to them, the ability to perceive new possibilities, and a determination to attain one’s goals
- A social attitude—the desire to establish, and the ability to build, good relationships with business partners
Interestingly, FM has found no difference in the repayment rates between partnership loans and regular loans made to first-time borrowers, and yet due to the nature of the partnership loans, borrowers on average commit themselves to finance charges 5% higher than they would have for a standard loan.