WAFAA Risk and Due Diligence

 Risk Overview:

The repayment rate for loans has increased in the microfinance international market, where the repayment rate is 98.35%. However, past repayment performance does not guarantee future results. When you lend money, you may lose all or some of your principal. You should be aware of the different types of risk and find the right loan option for you with respect to repayment risk and social return.


Lending to the poor online involves 3 levels of risk:-

Risk 1: Entrepreneur Risk

Each entrepreneur is screened by a local WAFAA Field Partner (Microfinance Institution) before being posted on WAFAA's website. The Field Partner looks at a variety of factors (past loan history, village or group reputation, feasibility of business idea, etc.) before deeming the entrepreneur as credit worthy. However, a number of factors can result in entrepreneurs defaulting:

  • Business issues (e.g., crop failure)
  • Health issues (e.g., malaria, HIV/AIDS)
  • Other issues (e.g.,  theft, paying for school fees over repayment, etc.)

If a default occurs, WAFAA's policy requires our Field Partners to be fully transparent about the reason(s) behind it.


Risk 2: Field Partner Risk

When you lend to an entrepreneur, WAFAA wires the funds to the local Field Partner to administer your loan. While this necessary intermediary increases the likelihood your loan will be effectively used and repaid, new risks are introduced:

  • Bankruptcy (e.g. the Field Partner may go out of business and be unable to collect your loan)
  • Fraud (e.g. staff members at the Field Partner may embezzle funds)
  • Poor operations (e.g. the Field Partner may have poor methodologies for screening entrepreneurs or collecting repayments)

To help you assess this risk, WAFAA assigns each Field Partner a 1 Star (highest risk) to 5 Star (lowest risk) Risk Rating. “See risk ranking of the field partners.”



Risk 3: Country Risk

When lending internationally, it is important to consider "macro-level" risks:

  • Economic (e.g. large currency devaluation renders the Field Partner's local currency collections valueless for you).
  • Political (e.g. Indonesia, Lebanon, Syria, Jordan and the Palestinian Authority, and other unstable regions. Funds repatriation may be difficult if central government policy changes.)
  • Natural (e.g. a tsunami or flood may greatly reduce the likelihood of loan repayment.)



Field Partner's Role

Field Partners are the critical ground link to entrepreneurs

WAFAA has field partners in 5 countries so far. Each has successfully completed an application process conducted by a local microfinance institution (MFI). These MFIs have entered into a Partnership Agreement with WAFAA to become one of our Field Partners, who are responsible for the distribution and collection of your loan.


Field Partner Role #1: Screen entrepreneurs and post loan requests on WAFAA

WAFAA Field Partners work in impoverished areas to screen and approve entrepreneurs who demonstrate a need for a loan and a reasonable likelihood of repayment. 

Over the last 30 years, 100 million entrepreneurs have been reached by such organizations, and data suggests the poor can be quite credit worthy (+95% repayment rates) if the Field Partner employs the proper screening methodology. 

One common methodology is to lend to entrepreneurs who belong to a borrowing group (e.g. a group of 5 women from the same village, who know each other well). Loans to one member of the group are contingent on the other group members repaying on time. Because each member's livelihood depends on other members' repayment, a form of peer monitoring and support develops, which helps ensure high repayment rates. Loans directly made to individual entrepreneurs are also common, especially as the entrepreneur proves their credit-worthiness in a group setting.


Field Partner Role #2: Disburse and collect your loan

When you lend to an entrepreneur, WAFAA wires the funds to the local Field Partner to administer your loan. Field Partners disburse the loan to the entrepreneur, and after a grace period, they begin collections. 

Typically, loan officers travel out to the entrepreneur's location (e.g. rural village) and collect a repayment on a monthly basis. Most of the time, entrepreneurs are able to pay the loan officer the full amount due on time without any issues. On occasion, an entrepreneur may be late in payments. 

You can view the percentage of Paying Back loans that are over one month late in repayment for any Field Partner at any time. This is an indicator of the success their collections efforts. Once funds are collected, the Field Partner wires funds back to Wafaa, and Wafaa's software automatically distributes the repayments to each internet lender.


Repayment Collection and Currency Risk

When lending funds across national boundaries, an implicit risk exists, with currencies changing relative to one another. The local currency in the Field Partner's country of operation may, for many reasons, lose some of its value relative to the USD, thus requiring the Field Partner to use more of its local currency to reimburse WAFAA (WAFAA’s working currency is the US Dollar).


Field Partner Role #3: Report impact and issues surrounding your loan

In addition to loan screening and administration, Field Partners document the impact of your loan in the form of Journals. Journals provide insight into the entrepreneur's progress and challenges. It is a key point of connection between WAFAA's lenders and their business partner across the world.


WAFAA's Role


WAFAA screens, rates, and monitors each Field Partner

50 is the current number of staff and volunteers working to make Wafaa a data-rich, transparent, online lending platform for the poor.

WAFAA's staff and volunteers work to create a highly transparent, data rich, lending platform for the poor. WAFAA 's main role, besides operating a website, is to screen, rate, and monitor each Field Partner, who in turn, is responsible for screening each entrepreneur listed on the site and administering your loan.

Each Field Partner has a different risk profile. Some are highly established with a proven track- record, and others are young and unproven, but with the potential to reach entrepreneurs not reached by more established Field Partners. Like eBay and other online marketplaces, WAFAA hopes an online lending platform will let unproven, riskier Field Partners build a great reputation through long-term performance. In the process, they should be able to raise capital from other sources, beyond WAFAA, to serve more of the poor in their area.


WAFAA Role #1: Initially screen each Field Partner

New Field Partners must meet WAFAA's Minimum Requirements in order to fundraise for local entrepreneurs on WAFAA's platform:

  1. Have a mission of lending to the poor for a social purpose with interest rates that are significantly discounted versus alternatives for the local poor.
  2. Be able to accept US dollar denominated debt capital from US lenders and manage a reasonable degree of currency risk.
  3. Be cleared of the US Department of Justice Terrorist Exclusion List and the Treasury Department's list of "Specially Designated Nationals and Blocked Persons."
  4. Provide WAFAA with legal incorporation registration documents recognized by the local government.


WAFAA Role #2: Assign each Field Partner a Risk Rating

Once the Minimum Requirements are met, each Field Partner is given a Risk Rating. A Wafaa Risk Rating is a 1 to 5-star rating, assigned to each Field Partner by the Wafaa staff. This rating reflects the estimated repayment risk associated with each partner, according to the evidence described below. A 1-Star rating indicates very limited evidence, supporting a Field Partner's repayment reliability, and a 5-Star rating indicates very significant evidence, supporting a Field Partner's repayment reliability.


Risk ranking:

1 star: Very Limited (Highest Risk)

2 stars: Limited (High Risk)

3 stars: Moderate (Moderate Risk)

4 stars: Significant (Low Risk)

5 stars: Very Significant (Lowest Risk)


Evidence, not driven by WAFAA, supporting a Field Partner's repayment reliability:

1. Recent Financial Audits, Credit Ratings, and Independent Evaluations

2. Most Reputable Outside Funder and Network Affiliations

3. Organizational Age and Sustainability

4. Existing Loan Portfolio Size and Risk


WAFAA works with leading Microfinance Industry experts to constantly improve its Risk Rating Model and with Field Partners to improve data quality / integrity.


Role #3: Monitor Field Partners and set monthly fundraising limits

The amount of money a Field Partner can raise each month for local entrepreneurs on WAFAA depends on their WAFAA Risk Rating. A well-established 5-star Field Partner can post over $100,000 of loan requests to WAFAA's website each month, while a less established 1-star Field Partner can post less than $10,000 each month. However, as a 1-star Field Partner proves itself over time, its Risk Rating will increase, which in turn, increases its monthly fundraising limit.

WAFAA routinely audits and monitors each Field Partner. If a Wafaa audit uncovers funds mismanagement, WAFAA will make this transparent on the website and take the appropriate actions to resolve the issue, including possible partnership termination and legal action in the case of gross funds mismanagement.


Lender Role:


As a lender, there are four things you can do to increase the likelihood of being repaid:


Rule 1: Learn more about the entrepreneur:

  • How many loans has the entrepreneur received and paid back in the past?
  • Does the business plan appear feasible?
  • Is the entrepreneur part of a borrowing group that will help ensure repayment?


Rule 2: Learn more about the field partner:

Lend via a field partner whose rating matches your repayment expectations:

5 stars = very high

4 stars = high

3 stars = moderate

2 stars = low

1 star = very low


Rule 3: Learn more about the country:

  • Is the country prone to economic or political disruptions?
  • Is currency exchange loss a possibility in this loan? If currency exchange loss is “possible” for a loan, lenders bear the risk of a loss if the US dollar appreciates by more than 20% against the local currency.


Rule 4: Diversify your portfolio:

The best way to reduce your exposure to any one entrepreneur, field partner, or country is to diversify where you place your money. Instead of placing $100 with one entrepreneur, we recommend you place $20 with five entrepreneurs.