Assessing the efficacy of a South African microlender's loan screening mechanism

Bivariate probit analysis was used to assess the efficacy of a South African microlender’s loanscreening process. This micro-lender grants short-term cash loans to individuals who areemployed and earning a fixed salary. Loan applicants with more stable incomes, who arecontactable via telephone or post, who are employed in less risky business sectors, who havemore disposable income relative to debt, and who have had a good credit history with otherlenders, are more likely to be accepted. None of the factors with a significant effect on the loanscreening decision could explain subsequent loan default by accepted applicants. The microlendermay have screened out very risky clients and accepted a riskier, profitable pool of loanapplicants with risk being controlled through effective monitoring. This is important wheretangible collateral is unavailable and where the risk must be acceptable to commercial lenderswanting to link up with profitable micro-lenders.