Published by Jerry Ostradicky, | 20 Nov 2008 at 05:58 pm
Last month Ryan Calkins started a discussions about whether or not the global financial crisis will hurt microfinance. CGAP is currently hosting a Virtual Conference on the Financial Crisis and I’ve seen some pretty interesting articles to add to the debate from last month:
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I’ve researched microcredit in Nicaragua on and off for the last two years. I’ve interviewed nearly three hundred clients from across the country. I’d say there are two main issues at play in looking at the limits to microfinance here. First, the vast majority of borrowers in the informal market. Investment in their business only lets them sell more bottles of pepsi, more gallo pinto or more cosmetics. The problem is one of adding value to the goods and services to people in this sector. I have interviewed so many people who have a group bank composed of people who all own pulperias and (presumably) just sell each other snacks. The ‘more’ successful clients I’ve talked with tend to be those involved in things like artesania where they can command a higher price, often by shipping their handicraft to another country (like guatemala or mexico).
Second, microfinance providers are prohibited from offering other kinds of banking services – they can only dispense loans. For agricultural clients who do no need more debt at the time of the year when the market is replete with corn and beans and the prices are very low, there is no place (other than under the matress) to put any savings. Both of these point to the immense problem of the dearth of small and medium enterprises here. Very few businesses served by MFIs have more than 1 to 3 people working for them including the borrower.
Finally, echoing the post I am a bit skeptical of the MNP motives. The MNP functions as a protection racket.However, the MNP works by members taking out as many loans as they can without any plans to pay them back. Members actually pay for the protection the group provides them from their creditors. If a loan officer comes to collect, they call up their MNP jefe and they chase them out of town or chop up their motorcycle.
I’d agree that financial literacy programs are important and underutilized. These loan products are quite straightforward – interest is a simple compound and borrowers know how much they owe every period and how much they will pay at the end of the term. If they dont think they can pay, they don’t have to borrow. You don’t get into $600,000 of debt in places like Jalapa by accident or financial illiteracy.
Alba Coruna not only gives out loans with low, subsidized interest rates but their clients do not appear on the country wide database of risky clients. For example, I can take out a whole bunch of AC loans, not pay all of them back, and then go in and try to borrow from a host of other MFIs linked in with ASOMIF (the industry association) and none of them will know how many loans I have outstanding. So I can then turn around and not pay them back either. Much more likely here is that these are soft programs to garner favor with the government backing them up.
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“These incidents are only a few examples of the bad feeling that microfinance institutions (MFIs) have inspired among a section of the rural population in north and central Nicaragua. So, why have the borrowers been protesting? Here are some reasons I’ve uncovered. High Interest Rates. Microfinance institutions in Nicaragua charge interest rates of as much as 21%. The protestors contend that this rate should be no more than 8%. Yes, 21% sounds like a large percentage of a small loan. However, microfinance institutions have high transaction costs, based on the labor-intensive process of managing repayments.”
Jct: Har har har. Mr. “High Interest” Microlending loanshark is given a Nobel Prize. I guess my boast of getting a Nobel Prize too as Mr. “No Interest” for my UNILETS Macrolending Millennium Declaration C6 for a time-based currency to restructure the global financial architecture.
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