Posts by leslieforman:
- Entrepreneurial journalists found out that as many as 30 microfinance borrowers had committed suicide in the state of Andhra Pradesh. This put the dark side of microfinance into the spotlight, and made it a political issue.
- When compared with other personal finance options in India, microfinance is a mass production with low-quality service. Microfinance Institutions (MFIs) are more aggressive about repayment, unlike moneylenders (who charge higher interest rates but are like “parasitic organisms… who don’t want to kill the host.”)
- Investors might be part of the problem, and not just part of the solution. The “bottom of the pyramid” gospel says that microfinance should commercialize, so it can scale and provide more opportunities to more people. The “social investors” promoting this gospel have good intentions, but their drive for scale might have lowered the service standards for these organizations.
Update from Unitus
December 22nd, 2010Today I received a detailed update from Unitus, and I think you might find it as fascinating as I did, for both its honesty and its comments about the state of microfinance in general. I made a small donation a few years ago, and have been impressed with the organization’s communications ever since. It begins:
Dear Unitus Donors and Supporters:
This is a follow-up to our July 2 announcement that we would redirect our efforts toward new poverty alleviation strategies and initiate no new microcredit acceleration projects. We want to keep you informed about what we’re doing to fulfill our commitments. This letter serves as a stewardship report from our board to you. We are dedicated to using your generous donations appropriately and in alignment with our core mission to help reduce global poverty.
Why We Are Changing our Focus
Unitus’ mission is to reduce global poverty through economic empowerment and this is not changing. What is changing is our focus going forward.
Almost 10 years ago, Unitus identified the potential to dramatically catalyze expansion of the supply of quality microcredit, and subsequently developed and deployed a methodology we called ‘microcredit acceleration’ to realize this opportunity. We saw ourselves as a catalyst for the microfinance industry, hoping that our methods and practices would be adopted throughout the industry. We are proud of the substantial, concrete, positive impact that we’ve been able to make with your support in the operations and scale of our 22 microfinance partners, in the industry overall – and ultimately, in the lives of nearly 15 million of the world’s desperately poor.
After considerable review, we concluded earlier this year that we had achieved our specific microfinance objective: to demonstrate the scalability and commercial viability of microfinance in such a way as to influence the flow of commercial capital toward this crucial poverty alleviation tool. Our decision to curtail additional microcredit acceleration projects was based on strong recommendations from Unitus staff and other respected microfinance experts that sufficient commercial capital was available in many regions to fuel microfinance growth, with additional providers continually entering the field. Understanding this, we felt that we should be very careful in how we would continue to commit precious donor funds to a strategy that had largely achieved its intent.
This realization then necessitated a very difficult decision. Not wanting to unduly spend donor funds on unneeded administrative overhead, we felt an important obligation to scale back our internal operations while still fulfilling our existing commitments and preparing for the next phase of Unitus. This was a painful decision because it involved laying off employees, winding down projects and closing a 10-year chapter of Unitus leadership in microfinance. Painful as it was, we believed then – and continue to believe now – that it was the right thing to do. All this being said, while we tried to make this change in a completely professional and caring manner, we realize that we made mistakes in the way our change was announced and implemented. We apologize for any ill feelings or misperceptions this may have caused to those within and outside the Unitus organization. We could and should have done better executing this organizational shift.
Read the rest here on the Unitus site.
What’s Happening with Microfinance in Andhra Pradesh?
December 1st, 2010Today I listened to this Global Prosperity Wonkcast with David Roodman:
A crisis is unfolding in India’s microcredit sector that– beyond its immediate effects on borrowers and lenders– will greatly affect the future of financial services for the poor. I’m joined by David Roodman, senior fellow here at the Center for Global Development and author of the forthcoming book Due Diligence: A Guide to Microfinance (which he has shared step by step on his Open Book Blog). David recently traveled to Andhra Pradesh, the epicenter of the crisis. On the Wonkcast, he leads me through the story of the explosive growth of Indian microcredit– and its sudden fall from grace. [more]
The microfinance crisis in Andhra Pradesh has been compared to the situation in Nicaragua, which I wrote about for MyKRO last year. I haven’t been following the news all that closely, and the podcast gives a fascinating overview. I found the following points particularly thought-provoking:
That’s a photo of microfinance borrowers in Andhra Pradesh, from this Indian news website.
Andhra Pradesh : Micro Finance becomes ‘Macro Curse’ for people The past few years have seen the entire microfinance sector grow exponentially. As with any other boom, suspicion always exists on whether a bust is just around the corner. This is especially true in the current international setting; with a major financial bust that humbled Alan Greenspan to admit he was “in a state of shocked disbeliefâ€.
In hindsight, it might seem obvious that the years of heady growth directly resulted in the sub-prime crisis and credit crunch. This heightens the sense of unease over the rapid growth of the microfinance industry and one is often seized of whether we are sitting on a bubble waiting to burst.In the case of microfinance, a bubble will be created if a significant number of members are funded beyond their repayment capability.
The atrocities of the Micro finance men on the consumers is increasing day by day. Already two people have committed suicides in the Srikakulam and Warangal districts and some suicide attempts.Since past two days the people have attacked the offices of microfinance and destroyed the infrastructure.
Read the rest here.
Overall, I think that the situation in Andhra Pradesh is devastating and tragic, but should not be interpreted as a blanket statement that microfinance is harmful.
I think that the key issues in microfinance are education and customer service. It is absolutely crucial that borrowers know how to use their loans, and that the MFIs provide real service. I think education and customer service should take precedent over commercial scale.
What do you think?
The Student Initiative Seeks New Fellows
November 11th, 2010My friend Akhila Kolisetty, who writes the excellent blog Justice For All, passed along this opportunity. She writes:
I worked with this organization (The Student Initiative) while studying abroad at LSE (Actually, I co-founded it and now am on the Board of Directors), and was wondering if you could help me pass along a great opportunity to any people, organizations, groups or listservs (particularly university student groups) who you think might be interested in microfinance and development.
The Student Initiative is a registered Charity and an incorporated non-profit ltd. company with official headquarters at the London School and Political Science (LSE) and is based and working at many leading universities.
The Student Initiative is unique because it combines academic grounding in leading university research and education with long-term work in the development sector. Its large student outreach and training enables it to identify the best individual students to work professionally on the issues and on-the-ground in development. Further information can be found on our website: http://www.thestudentinitiative.org/
The Student Initiative is currently accepting applications for new Fellows
What does it mean to be a Fellow?
The Student Initiative Fellows are the young, future and student leaders in development. An application to be a Fellow signals a desire and commitment to play a greater role in development, which The Student Initiative will facilitate. The organisation brings you closer to your ambitions of working in development in various ways. As a Fellow, you will be given guidance, advice and support for the initiatives that you propose. Also, Fellows are our priority candidates for the various opportunities (e.g. internships, research work etc) that we facilitate together with our partner institutions. You will be informed in advance of others about such opportunities, and given an exclusive application time period during which only Fellows will be allowed to submit applications for review. Being a Fellow also means that your CVs will be included in our database, which our partner organizations will have access to. This opens up career opportunities for you in the field of development. The Student Initiative also aims to help Fellows build up experience and gain more knowledge on development-related issues. Participation in the courses that we have designed, writing articles on various themes in development or the events that we organize, and even the organization of these events, are some of the avenues that you can explore you to gain an insight into various themes of development. We are also open to hearing your ideas on how you think you can deepen your involvement with development. Essentially, The Student Initiative aims to bring you closer to development-related issues and careers. If you have a passion for development, a Fellowship with The Student Initiative promises to be a rewarding experience.
To find out more about what our Fellows have done, take a look at our Get Informed pages.
How do I apply?
1. Send your most updated CV to info@thestudentinitiative.org. with the subject title ‘Fellowship Application – Your Full Name’.
2. Fill in this form with the relevant details. The deadline for applications is 15th November.
Should you have any further enquiries, please feel free to send them in to info@thestudentinitiative.org. We look forward to receiving your applications!
No Pago! Reasons to Resist Microfinance in Nicaragua
November 16th, 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 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 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. 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 capitalâ€(173). The book defines social capital as “the profound enabling power of an essential network of relationshipsâ€(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.â€Â 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!
