Free Email Updates
Hi, I'm a finance blogger who is interested in how different financial tools, including microfinance, can deliver real value to consumers.
Kiva Small Business Advisor for the Greater Seattle area. Reach me at email@example.com
Currently a Master of Public Administration (MPA) student at Bowling Green State. University in Bowling Green, Ohio, USA. Specializing in International Development with focus on sub-Saharan Africa.
I work in Advertising Operations at Zillow, but LOVE microfinance. I'm always interested in startups, especially non-profits, reach out to me if you're working on anything cool!
Published By Leslie Forman on November 16, 2009
“Why would borrowers in Nicaragua protest against microfinance?” my friend Michael asked me a few days ago.
Michael and I both majored in Latin American Studies at Berkeley. His email re-ignited my excitement for microfinance in Latin America. When I was studying abroad in Chile I interned with an organization called Accion Emprendedora, which sparked my interest in the intersection between business and social good.
Michael sent me this fascinating article: “No Pago” Confronts Microfinance in Nicaragua by Elissa Pachico:
Last January in northern Nicaragua, as a crowd of hundreds blockaded the Panamerican Highway late into the cool Monday nightâ€”soaking tires in gasoline before setting them on fire, hurling rocks at police and TV cameramen, bringing traffic to a standstill for 10 milesâ€”the words once again began appearing in news reports and political speeches and inside the National Assembly debate halls: No Pago, No Pago!
In the months that followed, the refrain was hardly absent from the airwavesâ€”not on May 12, when a group of 20 people smashed the windows of a truck belonging to a local microfinance organization, or in early September, when some loan officers were so harassed by protesters barricading their office doors and badgering the clients who attempted to enter that they decided to stop showing up to work altogether.
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. Confronted by the bold protests of the Movimiento de Productores, Comerciantes y Microempresarios de Nueva Segovia, or more colloquially as the No Pago (I Won’t Pay) movement, politicians are growing increasingly nervous that the group’s protests are scaring away international investors and could strike a heavy blow against the country’s shaky economy. (more)
Since reading this, I’ve researched like the committed and curious student of Latin America that I remember from college, perhaps for the first time for the 2.5 years I’ve been living in China.
So, why have the borrowers been protesting?Â 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%.Â Yes, 21% sounds like a large percentage of a small loan.Â However, microfinance institutions have high transaction costs, based on the labor-intensive process of managing repayments.
Though this is a much-cited reason for these protests, I donâ€™t think itâ€™s sufficient to justify the violence.
Encouragement from President Ortega
President Daniel Ortega has supported the protestors, with both explicit endorsements and direct involvement in a rival credit institution.
On July 12, 2008, Ortega visited the north of Nicaragua and made the following speech, as reported by Microcapital.org:
[He] called on the population to protest against MFIs charging usury interest rates in order to convince them to renegotiate their rates: â€œWe need to end this policy of usuryâ€¦go march and plant yourselves in front of the offices of the usurersâ€¦Be firm! The usurers donâ€™t have any other option: either they renegotiate or they renegotiateâ€. Ortega did not cite a particular MFI, and several microfinance organizations in the region were forced to close their doors due to protests led by a group of farmers called Movement of the Producers of the North (MPCS).
Mr. Ortega, a onetime Marxist revolutionary who led Nicaragua from 1979-1990, was re-elected in 2006 with 38% of the vote.Â In his campaign, he pledged to end â€œsavage capitalismâ€ and bring in foreign investment to help the 80% of Nicaraguans who live on less than $2 a day.
The state also recently started a new credit union called Alba-Caruna, which uses aid money from Venezuela. The website venezuelaanalysis.com describes the program in this way:
Caruna is the body that administers funds made available for development projects in Nicaragua within the framework of the Bolivarian Alternative for the Americas (ALBA). Currently, ALBA’s member countries are Cuba, Bolivia, Dominica, Nicaragua and Venezuela. The Honduran government has announced that it too intends to join ALBA shortly. So Nicaragua’s experience is important as an example and model of the economic alternative based on solidarity and fair terms of trade that ALBA represents.
A peer reviewer responding to an article on the Global Integrity Report describes the organization in entirely different terms, as “a compatible private microfinance bank loyal to Daniel Ortega.”
Regardless of one’s perspective on Venezuela’s influence across the Americas, it is clear that Daniel Ortega has a personal interest in Nicaragua’s microfinance sector.
Reversed Social Capital
In the book Influencer: The Power to Change Anything, the authors cite Muhammad Yunusâ€™ work with the Grameen Bank as an ideal example of a â€œhigh-level influence tool â€“ the power of social capitalâ€(173). The book defines social capital as â€œthe profound enabling power of an essential network of relationshipsâ€(174).Â By organizing Bangladeshi craftswomen into solidarity groups, he built the social capital necessary to ensure that these housewives-turned-entrepreneurs would repay their loans on time.
I believe that in Nicaragua, the â€œNo Pago!â€ movement has had far more success in leveraging social capital than the local microfinance institutions.Â As reported in the Latin American Herald Tribune, â€œThe leader of the protesters, Omar Vilchez, said on La Primerisima radio that they would continue until Congress approves a debt moratorium and the microlenders suspend for three years asset seizures from delinquent borrowers.â€Â Omar Vilchez also happens to be the former mayor of the town of Jalapa.Â He has denied direct connections to Daniel Ortega and Alba-Caruna.Â By attracting media attention, he convinced other borrowers to follow his example. Â In the words of Influencer, he turned â€œa me problem into a we problemâ€ (181).
I argue that strategic use of social capital has contributed to the success of microfinance in many places, but in Nicaragua it has contributed to its failure.
One Borrower, Many Loans from Many MFIs
One borrower involved in the Jalapa protests had amassed $600,000 in debt, ostensibly from many different MFIsÂ Taking out a loan to pay off another loan nullifies any poverty-alleviation effects, and locks borrowers into a cycle of debt.Â This is not only true in Nicaragua; a friend who served as a Kiva Fellow in Peru witnessed a similar trend there.
Ineffective Incentives Within MFIs
Both borrowers and loan officers need incentives that ensure the prompt repayment of loans.
Caroline Bressan, a Senior Portfolio Associate with the Calvert Foundation, explains in this excellent Q&A with Microfinance Focus.
From an investorâ€™s perspective, one thing that can be done is to fund those MFIs that are working to create positive incentives for those borrowers that do make their payments on-time. One example of this is BANEX in Nicaragua. They are currently raffling a new truck at each of their problem branches only to those clients who have kept making their loan payments. Another possibility is making certain types of loan products available only to those borrowers with a clean payment record or by creating a separate loan name for those same borrowers such as an Excellence Loan or Gold Level Loan, thereby creating something that they could be proud of.
Another lesson learned from this crisis is to scrutinize not only the procedures and policies of an MFI, but also the implementation of these practices. With the growth weâ€™ve seen in the industry over the past few yearsâ€¦ credit policies were relaxed in favor of higher growth rates. Many loan officers were incentivized based on the growth of their portfolio alone. Instead of focusing only on growth, the importance of portfolio quality and knowing their clients should also be stressed in loan officer training sessions and reflected in compensation packages. If loan officers are incentivized in the right way, they will put more energy into choosing the right clients for the MFI and avoid repeating what happened in Nicaragua, where some clients took out loans with no intention to repay. (more)
Drop in Remittances
With the U.S. economy in recession, Nicaraguan laborers working in â€œel Norteâ€ have not been able to send as much money home.Â I’ve heard that remittances are have dropped for the first time in Mexico, by 20% this year. And some Mexicans have sent money to support relatives in the U.S. Since Nicaraguans and Mexicans work in similar industries in the U.S., I think it’s fair to assume that the impact on remittances in Nicaragua has followed a similar trend.
Overall, Nicaragua’s “No Pago” movement can be seen as a “perfect storm” in which many factors contributed to the collapse of the microfinance ecosystem.
What do you think?Â I look forward to hearing your comments!