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.

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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.

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