Felix Salmon

Political risk in microlending

By Felix Salmon
November 9, 2009

Elyssa Pachico has an excellent round up of the No Pago movement in Nicaragua, which is threatening the future of microfinance in that country. While most of the reporting on the issue has been pretty one-sidedly in favor of the microlenders, mass protests don’t rise out of nothing, and in this case the initiating outrage seems to have been the arrest of six people with overdue debts in Jalapa by a lender called Pro Credit.

The fact is that there are good and bad microlenders, and that it’s a statistical certainty, given the number of such lenders in Nicaragua, that a pretty large number of them are bad. (Borrowing cheaply in dollars, lending at high rates in local currency, and acting only with an eye on their own bottom line — standard predatory lending, basically.)

Nicaraguan president Daniel Ortega has failed to condemn the protests, which are surrounded by all manner of rumors. You just knew that Hugo Chávez would be involved somehow:

Complicating matters is the widespread suspicion among No Pago opponents that the real intention behind the movement is to drive MFIs out of business, forcing poor farmers to seek credit through Alba-Caruna, a credit union created by Ortega’s government that is partly responsible for handling aid money from Venezuela. In one strange twist of events, a letter supposedly signed by Omar Vilchez was unearthed last January, in which he promised unwavering support for Ortega’s political initiatives in exchange for dismantling the microfinance industry.

“It is necessary to combat the financial system privatized in 1990, to stop depending on MFIs and banks, so that all can work with the people’s bank, with Alba Caruna, which gives us fair interests rather than usurious ones,” the letter states.
Vilchez has vehemently denied that he ever wrote such a letter, even offering to have his handwriting examined by the police so as to prove that his signature was forged. The leaders of the No Pago movement have repeatedly rejected the accusation that they are working in cahoots with Ortega’s government, asserting that they are independently funded and politically autonomous.

My feeling is that microfinance works best when it’s domestic, autonomous, and where the microlenders are cooperatives owned by their own clients. In general I get suspicious when the lenders and the borrowers come from very different populations, and even more suspicious when they come from different countries. If westerners want to support microfinance, they should do so with grant equity, not through loans: the debt in the organization should be local.

I’m beginning to sniff the beginnings of a backlash against microlending: the NYT, for instance, today covers a pretty minor development at Kiva, which has recently changed its documentation to make it more obvious that its US lenders are supporting microlenders rather than lending directly to borrowers. (But they take the full credit risk of an individual borrower, which is one reason I’m not a huge fan of the Kiva model, except as a way of giving ordinary Americans a real connection to policies and people in far-flung countries.)

Microlending can do good, but it can also do harm. And when tens of thousands of borrowers start threatening their local microlenders, that’s prima facie evidence that something has gone horribly wrong. And that the microlending movement, in the country in question, might have gotten rather ahead of itself.

2 comments so far | RSS Comments RSS

Hear, hear! Ever since “We can tap the capital markets for Micro” was a pipedream ten years ago, I have consistently tried to throw cold water on the various schemes to steer large amounts of foreign private money to Micro.

I have great sympathy with those who are desperate to scale up financial services to meet the hundreds of millions of underserved. But it’s going to end in tears for all the reasons you’ve outlined if some significant caution isn’t introduced soon.

Though I understand your preference for co-ops, I don’t think that co-ops are the only way to go, if for no other reason than they have major start-up difficulties. By definition most potential Micro clients aren’t integrated into formal parts of the political economy, so they aren’t already members of organizations that can be tapped for co-op particiation. However, non-profits of various other origins can serve a similar purpose and can, over time, include a co-operative dimension.

But regardless of legal form, I do agree that the equity part needs to non-profit-maximizing (and if it’s from foreigners, preferably a large part in the form of out-and-out grants). And the lion’s share of the liabilities need to be denominated in local currency.

As for your criterion “autonomous”, I’m not sure what you mean. A “Grameen” is “autonomous” vis a vis other countries and financial institutions, but its various local branches aren’t “autonomous”. Some other well-performing MicroFIs may be autonomous all the way down to the branch level but are part of networks that share technology, training, etc. and sometimes some common ownership or funding sources. And others are for most practical purposes multi-national banks (or parts of bank holding companies) that specialize in a certain clientele and set of products. What part of “autonomy” do you think is critical?

I do think it’s important that a significant part of a MicroFI’s balance sheet should (eventually) be liabilities subject to normal competitive rates. Unlike grant funding, market-priced liabilites provide the “market discipline” that forces the MicroFI to adopt and maintain sustainable business practices.

But I’d much rather see those liabilities grow organially along with the FI’s assets — frex, offering payment transfer and savings services are some of the most important financial services MicroFIs can provide to the otherwise non-bankable part of the population, often as or more important than credit. One of the reasons I prefer to talk about Micro Finance and Micro Finance Institutions, not Micro Credit or microlenders.

Small amounts of foreign borrowing can help a MicroFI get beyond start-up stage, or a foreign loan at a critical moment can help a MicroFI shift to another growth pattern. But foreign loans should never be viewed as one of a MicroFI’s core sources of funding.

Posted by nadezhda | Report as abusive

My biggest problem with the MFI has always been the idea of leaning on entire groups of people rather than just one lender. Yunus covered the reasons for this in his book “Banker To The Poor” but I still always found that the most distasteful part of the programs. Otherwise, I agree that organic and locally-owned MFIs are the way to go if just so that people know that they money is not coming from some “faceless corporation” but their own community.


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