“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 night—soaking tires in gasoline before setting them on fire, hurling rocks at police and TV cameramen, bringing traffic to a standstill for 10 miles—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 airwaves—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?  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.

Though this is a much-cited reason for these protests, I don’t think it’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: “We need to end this policy of usury…go march and plant yourselves in front of the offices of the usurers…Be firm! The usurers don’t have any other option: either they renegotiate or they renegotiate”. 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.  In his campaign, he pledged to end “savage capitalism” 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 Yunus’ work with the Grameen Bank as an ideal example of a “high-level influence tool – the power of social capital”(173). The book defines social capital as “the profound enabling power of an essential network of relationships”(174).  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 “No Pago!” movement has had far more success in leveraging social capital than the local microfinance institutions.  As reported in the Latin American Herald Tribune, “The 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.”  Omar Vilchez also happens to be the former mayor of the town of Jalapa.  He has denied direct connections to Daniel Ortega and Alba-Caruna.  By attracting media attention, he convinced other borrowers to follow his example.  In the words of Influencer, he turned “a me problem into a we problem” (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 MFIs  Taking out a loan to pay off another loan nullifies any poverty-alleviation effects, and locks borrowers into a cycle of debt.  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 investor’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 we’ve seen in the industry over the past few years… 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 “el Norte” have not been able to send as much money home.  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?  I look forward to hearing your comments!

  • Daniel Rozas

    Leslie — thanks for putting this analysis together. It sheds much-needed light on what’s happening on the ground and the link between non-paying borrowers and government and the analysis of the use of social capital is exactly on point. BTW, I’d suggest a word of caution for those jumping to blame the politicians — remember, a politician can only bank on existing resentments. If borrowers were more fearful of the MFIs closing and the consequent loss of access to capital, they wouldn’t be paying attention to the politicians and Omar Vilchez would be hounded out of town.

    There’s also another important element I’d add — Nicaragua is the 3rd most heavily penetrated microfinance market in the world (calculated as # of loans per total population). One must not ignore the possibility that extensive overlending is a significant and perhaps even the primary factor behind the No Pago movement.

  • I really appreciate your perspective on this. Thanks for your kind words. I agree that politicians react to and build upon existing sentiments in the community (though it can be easy to forget this when you live in China like I do!) Most of the Nicaraguan papers I scanned through seemed to paint the MFIs as the “bad guys” in this situation — giving out too many loans and charging too much interest to very poor people.

    Thanks Daniel! Awesome comment.

  • Alex Nading

    I’d echo what Daniel says about the possibilty of overlending; but I’d also add that microfinance–at least here in Nicaragua–is often treated like a black box. Get loans, start business, pay loans, gain capital. There are a few problems with this, because the loans get meaning in a specific social context:

    First, I don’t see much effort, not from the current government, and DEFINITELY not from any of the market-fundamentalist governments from 1990-2006 to match rhetoric about loans and social capital with real efforts to promote financial literacy. The loan-to-loan cycle Leslie describes is just as common in the urban parts of Nicaragua where I work. I have lived here for two years and can count on less than one hand the number of people I’ve met who credit microloans with a sustainable improvement in their quality of life.

    Second, an informal tradition of loan seeking and barter predates the advent of microfinance. The separation of microfinance from the informal economy (legal and illegal) and the increasing cost of living is shortsighted. In most neighborhoods, there’s always money if you need it, and many people who are by no means gangsters or loansharks see loaning money (at 20-30%) as a good investment if they come into some extra cash. High risk, high reward.

    Third, and related to the second, behind the opposition to microfinance is also a religious opposition to “usury.” “Zero Usury” is the program Ortega started to , (overtly) crack down on informal loans, and to (covertly) encourage people to choose Caruna over other microlenders. The program is very popular, and it has been delivered with a definite religious twist. It would make fascinating social science research. The issue that Ortega so astutely plays off of is those who’ve had experience with both microlenders and neighborhood informal lenders don’t really see the difference. Somebody is trying to make money by giving you money. That’s the credit system. There is something supernatural and scary and maybe even demonic about making money grow without appearing to do anything yourself.

    There’s also the intuitive knowledge that the number of microbusinesses and small farms that will be successful in a world of globalized agriculture and maquiladoras is finite. It’s frustrating to watch microloan organizations and NGOs churn out tortilla makers, tiny shops, restaurants, and piñata stores, most of which, like most small businesses in the US and Europe, fail to turn a profit. There can only be so many of those before the profits thin out. The money (if you can get it) is in working for the state or working for one of those same NGOs, or joining another treadmill, the maquiladora circuit.

  • Daniel Rozas

    BTW, take a look at an almost mirror-image case that took place in Andhra Pradesh, Indian in 2006. A great write-up is in the 2006 MF India State of the Sector report: http://www.microfinanceindia.org/state-of-the-sector-report.php

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  • Alex,

    It is so great to hear from someone on the ground in Nicaragua! I really appreciate your perspectives on this. Let me comment on your points one by one:

    1) I think that financial education is absolutely critical to the success of microfinance and think it’s ridiculous to lend and lend and lend without giving people the tools to use the financing in ways that can really improve their lives.

    2) Informal lending is big here in China too, especially within families. It’s how many of the factories in cities like Wenzhou got off the ground. Courtney McColgan, one of the founders of Wokai, actually researched this while on a Fulbright Scholarship here.

    3) I’ve never heard of this before, but the religious influences make a lot of sense to me. Usury is listed as a sin in the Bible, right? Also, religion often can tie a movement together — any kind of movement, really. I can see why a “Zero Usury” program could be popular. I agree that this would be a fascinating topic for a thesis or dissertation or something like that, since there are so many angles to look at.

    I also agree with your point about small businesses in the age of globalization. The organization I worked with in Chile, Accion Emprendedora, helped small businesses specifically confront these issues, though higher-level tutoring sessions on business strategy. For example, building relationships with children’s boutiques in rich neighborhoods to sell artisanal wooden toys. But I think that MFIs primarily focused on loan volume don’t have the capacity or inclination to provide that sort of support.

    I’m also curious: what brought you to Nicaragua? There was a point when I was in college when I was considering going there, but I eventually decided to come to China again.

    Thanks again!
    Leslie

  • Daniel,

    Thanks for that link. So interesting! I also came across mentions of similar protests in Bolivia and Pakistan. I think they are in the Microfinance Focus Q&A that I linked to above. Microfinance is sometimes referred to as a “silver bullet” and we all know that it;s much more complicated than that.

    -Leslie

  • Jct: http://www.youtube.com/watch?v=oRbnBn_0l8Q is my video
    Alex Cockburn on Yunus micro-loansharking
    where I point out how Yunus’ piggy bank makes microloans of depositors’ savings at 20%
    while LETS time-based currency software makes macroloans of new tokens interest-free.
    What deserves a Nobel Prize, microloans at 20% or macroloans at 0%.

  • John Harmsworth

    In this submission I will play the role of the ignorant outsider as I am a fairly recent discoverer of Kiva. I was previously aware of the Grameen bank initiative but I had no knowledge of the practical issues in play. I have found myself somewhat frustrated in attempting to identify loan requests on Kiva that I feel represent a real opportunity for advancement for the individuals borrowing and communties they are serving.

    Now that I understand better the types of interest that are charged on these loans I have even greater concerns. The off-setting factor which I would also have to investigate is the local inflation rate, but I find it hard to believe that loans at 20% for home improvement can be helpful to clients in the longer term unless their homes are unlivable.

    I always try to identify people who are borrowing to improve their productive capacity and/or their ability to serve their local market with goods or services that are otherwise unavailable or imported. It seems to me that the MFIs may be missing an important responsibility in not providing guidance on what constitutes a wisely sought loan. While most poor people are probably quite intelligent about small amounts of money, they may not have experience with borrowing. I also have a problem with reading that an MFI had 6 people jailed for failing to repay a loan. No Western organization should be sanctioning debtor’s imprisonment in the 21st century.

    At the same time it seems very likely that Mssrs. Ortega and Chavez have ulterior motives in their sponsorship ( control? ) of the Alba Caruna. Perhaps MFI involvement in Nicaragua has reached the saturation point and a refocusing is required. It seems to me that this would also be a good time to support an independent member owned credit union. This could be more community based which would reduce the travel requirements of the MFIs. After all, isn’t the intent of these programs to assist people to get out of the poverty trap?

  • “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.

  • MRD

    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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  • I am a lender’s agent in the USA representing banks, insurance cos and various private lenders.

    Let me say that a microloan at 21% is a bargain! It’s 100% unsecured and really they are so small, they are more like a nano-loan.

    It’s sad to see people manipulated by people like the shameful Ortega who only wants to line his own pockets – like politicians everywhere.

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  • disqus_rfgkvAhgYR

    21% is a real bargain! High risk, no collateral, small amount borrowed and inability to get a loan anywhere else – especially from the corrupt government. Because the principal (amount borrowed) is so small, the lender is losing money on each loan, even if it is paid back in a timely manner. In the US loans like this are unavailable at any interest rate. Get real!

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